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Maintaining a rental property typically requires a commitment of about four hours per week. Image: Liz Foreman for HouseLogic
From finding tenants to fixing faucets, renting out a home can be a lot of work. If that doesn’t dissuade you, you’ll appreciate collecting the rent checks and taking advantage of tax deductions.
In fact, you can use many rental property expenses to offset your rental income. IRS Publication 527 has all the details.
Writing Off Rental Home Expenses
Many rental home expenses are tax deductible. Save receipts and any other documentation, and take the deductions on Schedule E. Figure you’ll spend four hours a week, on average, maintaining a rental property, including recordkeeping.
In general, you can claim the deductions for the year in which you pay for these common rental property expenses:
Cleaning and maintenance
Commissions paid to rental agents
Home owner association/condo dues
Less obvious deductions include expenses to obtain a mortgage, and fees charged by an accountant to prepare your Schedule E. And don’t forget that a rental home can even be a houseboat or trailer, as long as there are sleeping, cooking, and bathroom facilities. Moreover, the location of the rental home doesn’t matter. It could even be outside the United States.
Limits on Travel Expenses
You can deduct expenses related to traveling locally to a rental home for such activities as showing it, collecting rent, or doing maintenance. If you use your own car, you can claim the standard mileage rate, plus tolls and parking. For 2015, it’s 57.5 cents per mile.
Traveling outside your local area to a rental home is another matter. You can write off the expenses if the purpose of the trip is to collect rent or, in the words of the IRS, “manage, conserve, or maintain” the property. If you mix business with pleasure during the trip, you can only deduct the portion of expenses that directly relates to rental activities.
Repairs vs. Improvements
Another area that requires rental home owners to tread carefully is repairs vs. improvements. The tax code lets you write off repairs—any fixes that keep your property in working condition—immediately as you would other expenses. The costs of improvements that add value to a rental property or extend its life must instead be depreciated over several years. (More on depreciation below.)
Think of it this way: Simply replacing a broken window pane counts as a repair, but replacing all of the windows in your rental home counts as an improvement. Patching a roof leak is a repair; re-shingling the entire roof is an improvement. You get the picture.
Depreciation refers to the value of property that’s lost over time due to wear, tear, and obsolescence. In the case of improvements to a rental home, you can deduct a portion of that lost value every year over a set number of years. Carpeting and appliances in a rental home, for example, are usually depreciated over five years.
You can begin depreciating the value of the entire rental property as soon as the rental home is ready for tenants and you hold it out for rent, even if you don’t yet have any tenants. In general, you depreciate the value of the home itself (but not the portion of the cost attributable to land) over 27.5 years. You’ll have to stop depreciating once you recover your cost or you stop renting out the home, whichever comes first.
Depreciation is a valuable tax break, but the calculations can be tricky and the exceptions many. Read IRS Publication 946, “How to Depreciate Property,” for additional information, and use Form 4562 come tax time. You may need to consult a tax adviser.
Profits and Losses on Rental Homes
The rent you collect from your tenant every month counts as income. You offset that income, and lower your tax bill, by deducting your rental home expenses including depreciation. If, for example, you received $9,600 rent during the year and had expenses of $4,200, then your taxable rental income would be $5,400 ($9,600 in rent minus $4,200 in expenses).
You can even write off a net loss on a rental home as long as you meet income requirements, own at least 10% of the property, and actively participate in the rental of the home. Active participation in a rental is as simple as placing ads, setting rents, or screening prospective tenants.
If your modified adjusted gross income (same as adjusted gross income for most persons) is $100,000 or less, you can deduct up to $25,000 in rental losses. The deduction for losses gradually phases out between income of $100,000 and $150,000. You may be able to carry forward excess losses to future years.
Let’s say that for the year rental receipts are $12,000 and expenses total $15,000, resulting in a $3,000 loss. If your modified adjusted gross income is below $100,000, you can deduct the full $3,000 loss. If you’re in a 25% tax bracket, a $3,000 loss reduces your tax bill by $750, plus any applicable state income taxes.
Tax Rules for Vacation Homes
If you have a vacation home that’s mostly reserved for personal use but rented out for up to 14 days a year, you won’t have to pay taxes on the rental income. Some expenses are deductible, though the personal use of the home limits deductions.
The tax picture gets more complicated when in the same year you make personal use of your vacation home and rent it out for more than 14 days.
This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice.
To keep his small apartment from feeling cramped, artist Matt Austin regularly pares down his belongings. For each new item that comes in, he tries to get rid of two unused things. Image: Anne Ruthmann for HouseLogic
Sweaters in the oven. Shoes in the kitchen cabinets. Books in the freezer. New Yorkers pay a median $3,400 a month for their tiny apartments, so they’ve learned to get mighty creative when it comes to maxing out every square foot. Although your house may be much roomier than the typical NYC studio (thank God), you can banish clutter once and for all by pledging allegiance to these six savvy strategies.
1. Cut It Out
You don’t have to organize the things you don’t have.
“I’ve reached my saturation point with stuff, so I developed a new formula,” says Matt Austin, an artist and designer living in a 700-square-foot railroad flat in Bushwick, Brooklyn. First, if he hasn’t worn something in two years, it goes. Then, if anything new comes into his life, something else has to go out. “Ideally, two things,” he says.
All photos in this article: Anne Ruthmann for HouseLogic
In addition to ruthlessly pruning your belongings, keeping an eye on how much to buy in the first place makes an even bigger difference. Adopt a capsule wardrobe — a minimal collection of clothes that mix, match, and layer for multiple uses. It frees up closet space considerably. Ask yourself a few questions before hitting the “Add to Cart” button on Amazon. Does it really make sense to order that quesadilla maker when you can already make quesadillas in your microwave, on your stovetop, and in your oven?
2. Think Vertically
Walls can do a lot more than hold the ceiling up.
“People look at space in terms of square footage instead of cubic footage,” says Ann Sullivan, owner of New York City-based Organizing People for Life. “Lie on the floor and look up.” Sullivan suggests hanging bicycles from the ceiling and installing shelves high up along the perimeter of a room. In the kitchen, free up drawer and counter space by hanging pegboards for utensils and magnetic strips for knives.
3. Give Your Doors More Than One Job
Use the inside of every closet, cabinet, and interior door of your home. Sullivan mounts magazine file boxes to the inside of kitchen cupboards to store tinfoil and plastic wrap. In her Manhattan two-bedroom, Organize Me Inc. owner Janine Sarna-Jones uses a Container Store system that allows baskets of varying sizes to attach to the back of the closet door for vertical storage tucked neatly into existing closet space.
A few more door ideas:
Mount your hairdryer to the inside of your sink cabinet.
Use shoe bags to store miscellaneous items like cleaning supplies, light bulbs, and batteries in your hallway closet.
Mount a horizontal towel bar on a closet door and hang boots, sneakers, scarves, or ties from it.
Store a whole drawer-worth of bras in one vertical cascade of connected hangers mounted behind your closet door.
Ilana Eck, a New York lawyer by day and founder of the entertaining and lifestyle blog “Stylish Spoon,” admits to holding on to a lot of belongings. The only way it works is by containerizing her life.
For her, organizing is all about storing her containers exactly where her family members will be when they’re in need of the contents. Toys are in inexpensive fabric storage boxes in her children’s closet.
The front hall closet hosts containers for her husband’s cycling gear.
Don’t forget your furniture can double as containers, says Sullivan, like ottomans with interior storage, or a coffee table with drawers.
If you’re using containers in a visible spot, “that can be part of your aesthetic,” says Sullivan. “But you have to be on top of how you’re displaying things.” Uniform containers are easier on the eye, and clear boxes are best hidden in closets.
5. Blend Your Belongings into Your Design
You can double your storage space by unabashedly keeping certain items out in the open instead of squirreling them away. For example, Sullivan suggests hanging pots and pans above a kitchen door if possible. What could be more appropriate kitchen decor than cookware?
Austin swears by what he calls the “anti-closet” — just a clothing rack out in the open. Doing so forces him to cut back on his possessions and keep them organized, since everything is visible. “The whole thing is really an exercise in artistic living through good design,” he says.
You can also consider which items you already own that can do double duty as fun design and storage. Clear out a spot on your bookshelf by using a stack of hardcover books as a quirky lamp stand. Or remove the pages from one of those books and wrap it around your wireless router or modem to eliminate the need to store these ugly necessities out of sight. 6. Pretend You’re Hiding Something — Where Would You Put It?
In spy movies, someone is always pulling valuables from secret hiding spots. You may not be a spy, but your home has lots of nooks and crannies that can become hidden storage, just like in the movies. Consider installing drawers behind stair risers or in the dead space under your cabinets. If there are a few inches between your refrigerator and the wall, build a roll-out pantry for storage.
Hide things in plain sight. Cut out the wallboard between the studs to create space to fit narrow shelves for small items. Then, cover the storage space with an easily removable painting or print. Or go the extra step and hinge the art to make a door. James Bond would be proud!
writes about homes, design, remodeling, and construction for online and print national trade and consumer publications, including “Better Homes & Gardens.” Previously, she was a senior editor at “Remodeling” magazine. Follow Stacey on Twitter.