Rental Property and Taxes- What you need to know to maximize your savings 4709 Maple Avenue, Bethesda, MD 20814Phone Fax

Advertising/Marketing for the property Cleaning, maintenance, and repairs Commissions Fees associated with homeowner’s associations dues Insurance premiums Interest expense Local property taxes Travel expenses (i.e. gas money spent traveling to the property) Supplies Rental Property Deductions Deductions refer to costs the owner incurs to place the property in service and maintain it.

Improvements and Repairs ***Morale: Categorize all work as repairs if possible! Repairs keep the property in operating conditions. Examples include, but are not limited to minor repaint jobs, fixing water leaks, repairing broken cabinets, doors, and windows. Improvements must be depreciated over their useful lives (defined by the IRS, of course), rather than deducted in the year paid. The cost of repairs can be written off in the year you pay them. There is a big difference between improvements and repairs. Improvements add to the value of the property or prolong its life substantially. Improvements would include additions to the property, upgrading a kitchen/bathroom, adding a swimming pool.

Depreciation Depreciation refers to the deduction that the IRS allows you to take for the wear and tear of your building over the years. As time passes, the quality of your building will deteriorate so, on paper your property it losing value. Of course, in reality the value of the property tends to appreciate over time. That’s why depreciation is an “accounting loss”-it’s simply on paper. And if you don’t claim depreciation, the IRS will make you pay more taxes through Depreciation Recapture when you sell the property. Keep in mind though, it is the portion of the property’s value that is attributable to the building which can be depreciated. Land is not depreciated.

According to the IRS, a residential property can depreciate over 27.5 years. For residential properties, the straight line method is used to calculate the general depreciation. For instance, a residential building with a cost basis of $300,000 would depreciate $10,909 per year ($300,000/27.5 years). Steve Calem, MBA, CMPS President Capital Funding Group