Rental Property Tax Deductions

Own residential rental properties? This article discusses how income from those properties impacts your taxes.

What Constitutes Revenue?

Generally, rental income is defined as any revenue you receive from the occupancy or use of residential property. Rent, obviously, is included in that revenue. Many owners are surprised to learn revenue also includes rent advancements, expenses paid by a tenant and any security deposits not returned to the tenant. In fact, revenue can also include amounts paid to cancel a lease, even if you had to sue the defendant to get it.

Yeah, Yeah, But What Can I Deduct?

Tax deductions associated with rental properties are strikingly similar to those found in any business. Technically, you can deduct any expense reasonably necessary to "manage, conserve or maintain" the property. Obvious deductions include mortgage payments, cleaning expenses, insurance premiums, service payments such as landscape maintenance, repairs, maintenance, etc. Overlooked rental property deductions include:

1. Expenses incurred in finding tenants,
2. Commissions paid to third parties that arrange for tenants,
3. Paying your accountant and/or lawyer,
4. Mileage for driving to and from the property [I said, "No more parties!"]
5. Depreciation of the property,
6. Depreciation of items in the property such as washing machines, furniture, etc.

Imaginary Rent DeductionA few creative property owners have suggested that they should be able to deduct their customary and standard monthly rent if the property is empty. The argument goes, "If the property is empty, I am not making revenue and should be able to deduct the $1,500 that I am missing out on." At first glance, this almost makes sense. Sadly, it doesn't fly from the perspective of the IRS. Since you are not receiving revenues, your total revenues for the year will be reduced by the loss rent. You can't double dip by deducting the $1,500 from the already reduced yearly revenues. The only things you can deduct are the expenses you incur during this period, and only for so long as you are actively trying to rent the place.

Rental properties are a great investment. Even more so if you stay on top of your taxes.

Truly Bizarre Taxes: The Tax on Illegal Drugs

One can never underestimate the enthusiasm that politicians have for trying to hunt up tax revenues. The creativity of some politicians can lead to bizarre taxes and unfortunate results.

Taxes on Illegal Drugs

One argument for the legalization of various narcotics is that massive tax revenues would be created. Interestingly, a few states already are trying to collect such taxes!

More than 10 states have tried to tax people that possess illegal drugs. For example, Kansas levies a drug tax on dealers as soon as they take possession of the substance. To avoid prosecution for failure to pay the drug tax, individuals possessing the drugs are supposed to purchase "drug tax stamps" and attach the stamps to the drugs in question. The stamps are valid for 3 months.

In an apparent attempt to promote compliance, the Kansas Department of Revenue promises:

"A dealer is not required to give his/her name or address when purchasing stamps and the Department is prohibited from sharing any information relating to the purchase of drug tax stamps with law enforcement or anyone else."

The tax is levied on cocaine, marijuana, methamphetamines and other hard drugs. Interestingly, the state collected over $300,000 in such taxes by going after individuals that were charged with criminal activity. This is better known as the "Al Capone Theory", which is derived from the fact that authorities were able to put away the famous mobster on tax evasion charges. Alas, criminal prosecutors have not always welcomed the illegal drug tax.

Drug Tax Foils Prosecution of Drug Dealers in Texas

The 5th Amendment of the Constitution protects Americans from being punished twice for the same crime. This concept, known as "double jeopardy", caused prosecutors in 1989 to literally beg the state comptroller's office to stop accepting tax payments by drug dealers. The reason? A Texas Criminal Court of Appeal ruled that the state law assessing taxes on illegal drugs constituted a "punishment". As a result, requiring the payment of the tax constituted double jeopardy if the taxpayer had already been charged criminally.

In an attempt to get their clients off on drug charges, criminal attorneys began advising them to rush to pay their drug?related taxes. The theory was that once the taxes were paid, the drug dealer could not be prosecuted because doing so would constitute a second punishment! The appellate court agreed with the theory and the state comptroller immediately stopped collecting the Texas drug tax.