When tax season rolls around, do you wonder whether you’re missing out on critical deductions? Knowing which operating expenses you can and can’t deduct could determine whether you pay more in taxes than necessary.
One significant tax deduction you can take advantage of is your rental property insurance. This key operating expense deduction can reduce your tax liability while helping to ensure your investment remains secure in the event of a natural disaster or other specific events.
This article will explain how to properly apply the rental property insurance tax deduction. We’ll also share additional deductible expenses that help you optimize your tax situation and explore ways to easily track your income and expenses. Getting these details right will usually result in a healthier bottom line for your rental business.
Can you deduct insurance for rental property?
Insurance premiums for rental properties qualify as a deductible operating expense because the IRS recognizes them as part of your routine costs as a rental real estate owner.
You can use this deduction whether you own the rental outright or operate under an LLC. If you rent out portions of your primary residence, you may also be entitled to deduct a portion of your homeowners insurance proportional to the rented space.
Also known as landlord or rental dwelling insurance, rental property insurance policies typically cover a broad spectrum of risks. This insurance can help keep you protected against unforeseen circ*mstances, including property damage due to natural disasters, theft, and vandalism. It also usually provides liability coverage, which can be an important first line of defense crucial if a tenant or their guest is injured on your property.
If you live in areas prone to specific hazards, like earthquakes, hurricanes, or floods, additional coverage can be secured through riders or even separate policies, offering comprehensive protection tailored to your property’s unique risks.
If you’re looking for a competitively priced landlord insurance policy right now, be sure to get a quote from Steadily.
Where to deduct rental property insurance on your tax return
Most investors use Schedule E (Form 1040 or 1040-SR) to report income and expenses related to rental real estate.
Your insurance expenses have a dedicated spot on Line 9 of this form, where you enter the total amount paid for rental property insurance over the tax year. It’s essential to keep accurate records and receipts throughout the year to substantiate this deduction in case of an audit.
If you own multiple properties, you typically divide the insurance costs appropriately and report them separately for each property on Schedule E. This segmentation is vital for accurately reflecting the operating expenses tied to each rental property.
Should you rent part of your primary residence, you would typically enter the proportional calculation of your homeowners insurance as the deductible expense. This may require additional documentation to clarify how you determined the portion of the premium applicable to the rented space.
Other tax-deductible items for rental property
- Mortgage interest: One of the most significant deductions available if your rental property is financed. However, this only applies to the interest portion of your mortgage payments, not the mortgage principal.
- Repairs: Immediate fixes or necessary repairs to your rental property, such as fixing roofs, windows, and appliances, are fully deductible in the year they occurred.
- Maintenance: Routine maintenance costs that keep your property in good condition, such as landscaping, HVAC servicing, and pest control, are deductible.
- Depreciation: While the market value of your real estate property may appreciate, the IRS allows you to deduct depreciation expenses over a set period. That period is 27.5 years for residential rental properties, which offers a substantial yearly tax deduction without affecting your actual cash flow.
- Property taxes: You can deduct the real estate taxes paid on your rental property annually.
- Utilities: Should you pay for any utilities not reimbursed by the tenant, these costs are deductible. Those business expenses may include water, sewer, garbage, electricity, and natural gas for rental property.
- HOA fees: Any homeowner association fees paid for properties within an HOA-managed community are deductible.
- Professional services: Fees for legal advice, accounting, and property management services (including leasing commissions) are fully deductible because they contribute to the operational efficiency and legal compliance of your rental business.
- Travel expenses: You can deduct costs incurred from traveling to and from the rental property for management, maintenance, or inspection purposes. That includes both local mileage and longer travel expenses, provided they are solely for rental activity purposes.
- Advertising: The marketing expenses for advertising your rental property, whether online, in newspapers, or through leasing agents, are deductible.
Non-deductible expenses for rental properties
- Improvements: Any work that significantly increases the property’s value, such as adding a room, renovating a kitchen, or installing a new roof, is generally considered an improvement and must be depreciated over time rather than deducted entirely in the year incurred.
- Lost rent: If a tenant moves out and you lose rental income, you can’t deduct this lost rent. However, legal fees and court costs incurred while attempting to collect unpaid rent are tax deductible.
- Land costs: The cost of land associated with your rental property isn’t depreciable and, therefore, can’t be deducted. While you can deduct expenses related to land maintenance (e.g., landscaping), the initial cost of purchasing the land isn’t deductible.
- Loan principal payments: While interest on the mortgage for your rental property is deductible, the principal portion of the payments are not. The repayment of the loan principal is considered a form of investment in the property rather than an expense.
How to maximize your rental property tax deductions
It’s generally best to establish a reliable system to easily categorize your expenses as you incur them throughout the year. Be sure you keep all receipts and invoices related to your rental activity, including repairs, maintenance, insurance, and utilities. The more organized they are, the easier they are to find should you need to produce them for an audit or reconcile the amounts at a later date.
Maintaining a separate bank account for all rental-related transactions also simplifies your ability to distinguish personal expenses from rental property expenses, helping ensure you don’t miss out on any deductible items.
These best practices can facilitate the tax filing process and empower you to make data-driven decisions on improving your rental property profitability.
Want to make your next tax season a breeze?
Stessa makes organizing and tracking your rental property finances straightforward so you can maximize your tax deductions hassle-free.
With features like easy receipt scanning, automatic transaction categorization, and detailed financial reporting, Stessa offers a compelling and largely automated way to manage your portfolio more efficiently.
Simplify your rental property accounting with Stessa today so you can get the most out of your investments.
Find this content useful? Share it with your friends!
