Real estate investments offer significant tax advantages, allowing Utah investors to deduct a variety of expenses associated with managing, maintaining, and improving rental properties. By tracking eligible expenses carefully, you can maximize your deductions, reduce taxable income, and ultimately boost your return on investment (ROI). Here are the key expenses Utah landlords should track to take advantage of tax deductions.
1. Mortgage Interest
Mortgage interest on loans for rental properties is one of the largest and most beneficial deductions for landlords. Interest on mortgage payments, as well as interest on loans used for improvements or renovations, can often be fully deducted.
- Example: If you pay $12,000 in mortgage interest annually on your rental property, this entire amount may be deductible as an operating expense, helping you reduce your taxable income significantly.
- Tip: Keep annual mortgage statements and records of any additional interest payments for tax filing purposes.
2. Property Taxes
Property taxes are another significant deduction. In Utah, property tax rates vary by county, but landlords can deduct the full amount of taxes paid on rental properties.
- Documentation: Keep all property tax bills and payment receipts as records. You can deduct these taxes as part of your annual operating expenses.
- Tip for the Utah real estate Investor: Property taxes vary across Utah’s counties, so track each property separately if you own rentals in multiple counties to ensure accuracy.
Visit the Utah County Property Tax Office to find specific property tax rates and requirements by county.
3. Repairs and Maintenance Costs
Expenses related to repairing and maintaining the property to keep it in rentable condition are fully deductible in the year they’re incurred. This includes both routine maintenance and necessary repairs, such as fixing leaky plumbing, repainting, replacing broken windows, and landscaping.
- Examples of Deductible Repairs: Plumbing and electrical repairs, HVAC maintenance, repainting, landscaping, and roof repairs.
- Separate from Improvements: Be mindful that property “improvements” (such as a major kitchen remodel) must be depreciated over time, rather than deducted fully in the year they’re completed.
- Tip: Keep all repair invoices, work orders, and receipts, as the IRS requires detailed records for repairs versus improvements.
earn more about deductible expenses from the IRS Rental Income and Expenses guidelines.
4. Depreciation
Depreciation is one of the most powerful deductions available for a Utah real estate investor. For tax purposes, the IRS allows you to depreciate the value of your rental property (excluding land) over 27.5 years, which reduces taxable income without impacting cash flow.
- Depreciable Amount: Determine the value of the building (excluding land) based on purchase price and property assessment, then divide by 27.5 years to calculate the annual depreciation deduction.
- Improvements: Major property improvements, like new roofing or additions, are also depreciable, with the timeline varying based on the type of improvement.
- Example: For a property valued at $275,000 (excluding land), your annual depreciation deduction would be $10,000. This non-cash deduction significantly reduces taxable income.
See IRS guidelines on depreciation in IRS Publication 946 for a detailed explanation on calculating depreciation.
5. Property Management Fees
If you use a property management company, management fees are deductible as an operating expenses are tax deductions. This includes all fees associated with property management, such as leasing services, rent collection, and tenant screening.
- Documentation: Keep a record of monthly or annual property management invoices to track this deduction accurately.
- Example: If you pay 10% of monthly rental income to a property manager on a property that earns $2,000 per month, you can deduct $2,400 in management fees annually.
6. Insurance Premiums
Landlords can deduct premiums for various types of insurance, including property insurance, liability insurance, and any additional coverage like flood or earthquake insurance if applicable.
- Types of Deductible Insurance: Property insurance, liability coverage, and landlord-specific policies covering loss of rental income in case of property damage.
- Tip: If you purchase multi-property insurance policies, allocate premiums by property to maximize deductions accurately.
7. Utilities and Operating Expenses
Utilities that you pay for as the landlord, such as water, electricity, gas, trash removal, and internet, are deductible expenses. If tenants pay for some utilities directly, only the costs you cover as the landlord are deductible.
- Documenting Utility Payments: Keep monthly utility bills to track expenses accurately, especially if you provide utilities as part of the lease.
- Example: If you pay $100 monthly for water and trash for your rental property, you can deduct the full $1,200 for the year as a utility expense.
8. Legal and Professional Fees
Legal fees for lease drafting, eviction services, accounting, and tax preparation are all deductible expenses. This category includes fees for legal advice, CPA services, and real estate consultations specific to managing your property.
- Deductible Professional Services: Tax preparation fees, attorney fees for lease agreements, eviction-related legal costs, and consultations with real estate professionals.
- Example: If you pay $800 for tax preparation and legal services for property management, this entire amount is deductible.
Join our Utah real estate investor group to connect with other Utah landlords and learn advanced tax deductions strategies for real estate investors.
9. Travel Expenses for Property Management
If you travel to and from your rental property for management purposes, travel-related expenses are deductible. This includes costs for driving, such as mileage, and even lodging and meals if you manage out-of-state properties.
- Mileage Deduction: In 2023, the IRS standard mileage deduction is 65.5 cents per mile for business travel, which applies to miles driven for property management purposes.
- Example: If you drive 500 miles annually for property-related trips, your deduction would be $327.50 (500 x $0.655).
- Tip: Keep detailed mileage logs, receipts, and records of travel expenses specifically related to property management.
10. Marketing and Advertising Costs
Expenses for advertising a rental property are deductible, including online listings, signage, paid ads, and listing fees on popular platforms like Zillow or Apartments.com.
- Examples of Advertising Costs: Costs of professional photography, social media ads, website creation, and traditional signage.
- Example: If you spend $300 on online listings and signage when marketing your rental, the entire amount is deductible as an advertising expense.
Final Thoughts on Tax Deductions
Maximizing deductions is essential for improving your rental property’s profitability and optimizing your tax benefits. By carefully tracking mortgage interest, property taxes, repair costs, and other eligible expenses, a Utah real estate investor can reduce their tax burden and keep more of their rental income. Working with a real estate-savvy accountant can further help you identify deductible expenses, utilize depreciation, and stay compliant with tax regulations.
Need help maximizing your deductions? Schedule a strategy call to explore tax-saving strategies tailored for a Utah real estate investor.
