If you are a landlord, then you use to enjoy several tax benefits as the owner of a real estate property. If you have rented your property out, then you receive rents from the tenant. The rents that you receive from the tenant is treated as income. This comes in the calculation of your income taxes. There are however various items such as property taxes, utility bills, repair costs and vehicle mileage that can be deducted to offset the rental income. In case a mortgage is placed on the rental property, then the interest that you pay to the lender for taking out the mortgage loan, is deducted from your income while calculating your income taxes. This is perhaps the largest deduction that a landlord can get. Many tax pundits are of the opinion that mortgaged rental real estate offers more tax advantages than most of the other investments.
Rental income and deductions of mortgage interest
As per the rule of the Internal Revenue Service (IRS), if you receive any payments for the usage and occupation of your property, then it is termed as rental income. Advances that you receive as rents, property-related expenses paid by the tenants, lease options etc, come under the category of rental income. The rental income that you receive come under the gross income and as a responsible citizen, you should report this rental income to the tax authorities at the time of filing your tax returns.
In order to offset the income that you receive as rental income, there are some common expenses (incurred in an year), that can be deducted from the income. As per the rule of the IRS, the interest amount you pay towards mortgage payments, is deducted in the same year in which in it paid. In addition to that, the expenses that you incur to obtain the mortgage loan, is also deducted, provided that the expenses are spread over the entire term of the mortgage loan. All the deductible interest are listed on the Form 1098. You receive the form from the lender. The Form 1098 is used at the time of filing of the income tax return.
Other deductible mortgage expenses
In addition to the interest paid on the mortgages for a year, there are some other mortgage expenses that are deductible. Whether the loan is refinanced or a fresh loan is taken out, different mortgage expenses such as discount points, loan origination fees and other costs amortized over the entire term of the loan, are also deductible under the IRS rule.
Given these huge tax advantages, it makes sense to rent out the property on which mortgages are still there.