I’m curious to know what can be reported as expenses when investing in a rental property.
For example: If I buy a house and invest $20,000 in repairs and then rent the house for $1500 per month, my total revenue will be $18000 for the year. What expenses can be deducted for the purpose of taxes? Could the $20,000 in repairs be deducted? I can imagine if this were the case, in some instances the expenses would be greater than the actual income! Or would repairs which increase the home’s value only apply if I sold it for a capital gain (as in flipping the house)? I assume things like insurance and maintenance throughout the renters’ stay can be deducted correct? Please provide as much detail as possible.
Capitol improvements cannot be deducted as expenses but are depreciated throughout their lifetime. Some improvements (carpet) can be depreciated in a little as 7 years, some must be depreciated over 27.5 years. Generally, any costs incurred while the home is not actively for rent (being rehabbed/prepared for the initial tenant) cannot be expensed. You will need to do a little research to see which are which, there are too many too specify in a response. Every kind of other normal business expense can be expensed such as, auto mileage, dedicated business phone (or portion of personal phone) insurance, interest, taxes, repairs, advertising, legal fees, accounting fees, HOA fees. There are many regulations regarding costs specifically incurred during the purchase: points, title insurance, etc, that determine if the cost must be added to the purchase price and depreciated or if it can be expensed. I would suggest getting a copy of the IRS regulations and studying them as well as picking up a book or two on RE investing accounting. It might be wise to pay a CPA for an hour or so of their time to help clear up any questions you have after reading some of te material.
$20k probably rises to the level of a renovation, not a repair, and would be depreciated. However, you should break down the renovations, as certain classes of assets get preferential treatment: appliances, carpet/flooring, HVAC, etc. If your $20k involved a roof for $15k, and “other stuff” for $5k, you could probably get by with calling the $5k repairs.
Normal deductions for rental properties are: utilities, insurance, interest, landscaping, property taxes, office expense, postage, telephone, mileage.
Yes, any improvement that is depreciated is taken into account when you sell the property, but you should be aware that “flipping” the house is not a capital gain. Flipping is ordinary Sch C income, subject to FICA/Medicare as well as income tax.