Duluth GA CPA: Understanding the Tax & Legal Effects of Rental Properties

The below is a sample inquiry we might receive from a client seeking clarity on how to address their handling of income, expenses, tax deductions, depreciation, repairs and improvements of rental properties:

John: I hope that you are doing great. I have a question. Am I correct that we don't have a deduction for any of the mortgage interest that we pay on our rental property? My understanding is that we may be able to write off depreciation and maybe some of our expenses for repair/improvements. I believe that repairs v. improvements are treated differently. The reason I'm asking is that I am thinking about paying off or at least substantially paying off the remaining mortgage balance on the rental house and need to know if there are any tax advantages to paying it off over time?  I personally would rather start keeping the rental income for ourselves.

Below is my response:

If the interest rate on our loan is better than you presently have the money invested in then it would be most prudent to pay off the rental properties. You do get a tax deduction for the mortgage interest but as you are not in a 100% tax bracket, it is always better to pay off loans when you can as well as to be devoid of any debt.

You are correct in that improvements to residential rental property have to be capitalized and then amortized over their useful life, whereas repairs & maintenance are expensed in the year incurred.

Also I suggest you put your rental properties in an LLC ASAP to help protect your personal assets from any legal liability issues. Otherwise you run the risk of losing all of your personal assets if a suit occurs involving your rental property.

John Dillard, CPA of His CPA, PC, 1940 Woods River Lane, Duluth, GA 30097  Phone 770-814-9304   http://www.HisCPA.com/     http://www.John-Dillard.com/   Dare to Attempt Something so Great for the Kingdom of God that it is doomed to failure, lest Christ be in it!