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Rental Owner Taxes: Expenses

Updated: Jun 4, 2020

It's that time of year again, time to start gathering information to file your taxes. It is simply an inevitable part of life that no one enjoys.

So what qualifies as an expense? It is important to understand that there are 2 types of expenses, current & capital.

Current expenses are usually those that come with regularly operating a rental business, or expenses to keep the property in good safe condition. The IRS considers the following 'requirements' for current expenses:

  1. Current: Current expenses must have more short-term value than long-term value. Fixing a hot water heater has short-term value. Replacing the appliance has long-term value.

  2. Directly Related to Your Rental Activity: The expense must be business related. It would be hard to use new pair of shoes as a current expense on a rental property, but paying your property manager would be directly related.

  3. Ordinary/Necessary: Ordinary expenses are those that are common and generally accepted in the business. Necessary expenses are those that are deemed appropriate, such as interest, taxes, advertising, maintenance, utilities, and insurance.

  4. Reasonable: Your expenses must be reasonable in amount. If you claim to have paid $500 for a toilet seat, you will get audited.

Capital Expenses are items that actually will increase the value of your rental or is helping to extend its life. These are items that must be depreciated over time. It if costs a lot to replace it should probably be a capital expense.

With all that said, I am not a tax professional. ALWAYS check with your tax attorney or CPA regarding specifics or any questions you have.

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