What can I deduct from my rental apartment?

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Q. I bought a Florida apartment that has an association fee every month. I rented it out for full year. Now what kind of expenses can be deducted for income tax purposes? How should I handle depreciation and other expenses?
— Landlord

A. Congrats on becoming a landlord.

Let’s start with depreciation.

The purchase price of the apartment plus any costs associated with the acquisition, such as attorney fees and closing costs, are eligible for depreciation purposes, said Steven Gallo, a certified public accountant and personal financial specialist with U.S. Financial Services in Fairfield.

He said the IRS guideline for depreciation of residential real estate is straight line over 27.5 years.

“This means you would take the total costs of acquisition subtract the land value, since the cost of land is not eligible for depreciation, and take 1/27.5 per year as a depreciation cost against rental income,” Gallo said.

He said because this is an apartment, to determine the land cost, you should look at your property tax bill. It will usually show a value for land and one for improvements.

“Apply the percentage that the land value represents of the total value and apply that to your acquisition cost,” he said. “This is the amount that you will not be allowed to depreciate.”

Gallo said if you purchased the unit furnished, you may also estimate the value of the furniture and appliances, deduct that from the acquisition cost, and depreciate that amount over seven years. If you had to furnish the unit yourself, any money spent on furniture and appliances would be depreciated over a seven-year period.

“Keep in mind that any depreciation expense taken over the period of ownership will reduce your cost basis, which will affect your taxable gain upon sale of the unit,” he said.

As for other deductible costs, any costs incurred by you for the unit are deductible. These include real estate taxes, association dues, utilities, cleaning and maintenance, insurance, water, sewer, management fees, cable television and repairs.

You can even deduct the cost of your travel to inspect the property on an annual basis, he said.

“Keep in mind that all these deductions reduce the rental income you receive for tax purposes, however, if the net result is an operating loss – expenses exceed income – you will not get to take that loss against other taxable income in most cases,” Gallo said. “The non-deductible loss is carried forward and will be deductible if and when you sell the unit therefore, reducing any potential gain as a result of the sale.”

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This story was originally published on May 20, 2019.

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