Managing rental properties involves various costs, from property taxes to maintenance and repairs. Utility expenses are one area that often raises questions for landlords. Maximizing rental income depends on understanding how these expenses align with your tax responsibilities. Knowing whether utilities are tax-deductible for property owners partnering with Great Energy 1 can lead to significant annual savings.
This article will explore whether utilities are tax-deductible on rental properties, which utilities can be claimed, and how landlords can take advantage of these tax benefits.
How To Deduct Utilities On A Rental Property
For landlords who own SFR or diverse real estate, utilities could be a tax-deductible outlay. Let’s look at how utility expense deductions work in Three different situations:
Multifamily Rental Property Utilities
- Master Meter Setup: In small multifamily buildings, utilities like gas and water are often on a master meter, which means the landlord pays the bills and records expenses via rent adjustments.
- Rent Calculation: If a 3-unit triplex’s monthly water bill is $150, for example, the landlord might raise the rent on each unit by $50 to help with this cost.
- Billing Methods: Landlords might charge tenants a set fee or include utilities in the rent. Speaking with a property management company can reveal local market trends.
- Income and Deductions: If the gross rent is $1,000 per unit, the total monthly income would be $3,000. Landlords can write off other expenses, including utilities when they file taxes.
Owner-Occupied Multifamily Property
- Owner Occupancy Benefits: Living in one unit qualifies investors for FHA or VA financing, streamlining the loan application process.
- Utility Deductions: If the landlord occupies one unit and the overall utility bill comes out to $150, they can only deduct the utilities consumed by tenants—that is, $100 if one-third is used by the landlord.
Single-Family Residence (SFR) Utilities
- Tenant Responsibility: Tenants usually pay utilities straightforwardly. When properties are empty, landlords can, however, write off utilities.
- Vacancy Example: Should a vacant house pay a $200 utility bill, this can be written off as an operating expense.
- Landlord Accounts: Utility companies provide and help ensure accurate accounting for utility expenses by streamlining the service transfer between tenants.
Top Rental Property Tax Deductions
Maximizing tax deductions as a rental property owner will help to reduce your tax load. Essential is knowledge of which expenses are deductible and how to properly claim them. This is a thorough guide to the top rental property tax deductions to enable you to negotiate the process successfully.
Mortgage Interest
Mortgage interest is among the most significant deductions available. You can write off the interest part of your payments if your rental property has an outstanding mortgage. Principal and interest make up mortgage payments; only the interest is tax-deductible. Ensure your lender sends you IRS Form 1098, which records the interest paid during the tax year.
Property Taxes
Owners can write off all the paid property taxes if the rental property is used for business purposes. Unlike personal tax returns, which cap property tax deductions at $10,000, rental properties have no such cap, provided you actively participate in their management.
Repairs and Maintenance
Regular property repairs pay for immediate tax-deductible expenses. Whether repainting a room or fixing a leaky faucet, these costs can lower your taxable income that year. Repairs, on the other hand, preserve the property; improvements add value and have to be depreciated over time.
Utilities
As the landlord, you can write off any utilities you pay for—water, gas and electricity. Should the tenant reimburse you for the utility payments, you can document the expenses by classifying the payment as income and then subtracting the utility costs. Remember, the account should be in your name for utilities to be qualified.
Depreciation
Since it lets you divide the cost of your rental property—including improvements—over its “useful life”—depreciation is a significant deduction. The IRS reports that a residential rental property has a 27.5-year helpful life. You will need a depreciation schedule to determine your annual deduction—which an accountant best manages.
Insurance Premiums
Home insurance premiums covering your rental property are also deductible. You can claim the whole premium if it relates to the tax year. However, if you prepay for multiple-year coverage, only the amount applicable to the current tax year is deductible.
Property Management Fees
The fees of a property manager hired to handle tenant screening, rent collecting, or maintenance are tax deductible. This deduction can set expert services’ expenses and simplify property management.
Advertising Expenses
Whether through internet listings, newspaper ads, or even physical signage, any money spent marketing your rental property can be deducted as advertising expenses. This covers costs for advertising-related professional photography or videography.
Home Office Expenses
You might be eligible for a home office deduction if you actively manage your rental property and use a designated area in your house as a workspace. Based on the square footage of your office, this deduction can apply to some of the mortgage interest, utilities, and insurance for your house.
Travel Expenses
Deductible travel expenses for the upkeep of the rental property or rent collection are those Recorded mileage and costs for business use, whether you drive to visit a property or pay someone to handle repairs. Travel for improvements, such as significant renovations, is not deductible, though, and must be included in the expenses for the improvements.
Professional Services
Another tax-deductible cost is hiring experts to handle your rental property—accountants, attorneys, or bookkeepers. These expenses, which relate to the rental property, lower your taxable income, whether you need help drafting legal agreements or filing taxes.
Cost of Appliances
You can write off the expense if you buy appliances for your rental house. If they are considered significant improvements, though, they might have to be depreciated over time rather than deducted entirely in the year of purchase.
Hired Labor for Repairs
If you call experts for repairs, their labor expenses are deductible. This applies to plumbers, electricians, or any other service provider performing required maintenance on your property.
Knowing these important rental property tax deductions guarantees that you maximize your investment and helps you save money. Always see a tax professional to verify eligibility and prevent expensive errors.
How To Track Rental Property Tax Deductions
Tracking rental property income and tax deductions can be difficult, especially with several properties. Though they are not especially suited for rental properties, standard procedures call for using basic spreadsheets or general accounting software like QuickBooks and Wave. Depending on how well one understands accounting vocabulary, these techniques can cause errors like duplicate expenses or neglect of deductions.
Designed to track rental income and expenses automatically, many real estate investors choose specialist tools like Great Energy 1. Once a free account is created and bank and mortgage accounts are linked, transactions are automatically synced, producing financial reports for many properties is straightforward. Great Energy 1 also provides access to tax resources, mobile apps for expense tracking, and safe document storage to help make rental property management more accessible and maximize tax deductions.
Tips For Rental Property Tax Deductions
Owning rental property offers benefits like rental income and long-term appreciation but also comes with tax responsibilities. The IRS provides essential tips for rental real estate income, deductions, and recordkeeping.
What Is Rental Income?
- Payment received for using a rental property.
- Includes average rent, advance rent, lease termination fees, and tenant-paid landlord expenses.
- Security deposits count only if used as a final rent payment or for unpaid rent.
Deductions For Rental Property Owners
- Ordinary and Necessary Expenses: Maintenance, repairs, management fees, mortgage interest, utilities, insurance, and depreciation.
- Capital Improvements: Capitalized over their useful life and recovered through depreciation, unless claiming bonus depreciation.
Summary
Utilities are a valuable tax deduction for rental property owners, helping to reduce operating costs and maximize profits. Whether managing multifamily units or single-family homes, understanding how to properly deduct utility expenses—such as for vacant properties or tenant-occupied spaces—is essential for optimizing your tax returns. Additional key deductions include mortgage interest, property taxes, maintenance, depreciation, and insurance premiums. To streamline this process, tools like Great Energy 1 can simplify expense tracking, ensure accuracy, and help you claim every eligible deduction. For the best results and to avoid mistakes, it’s always wise to consult a tax professional who can guide you through the nuances of rental property tax benefits.