Owning and managing a rental property is an amazing way to grow equity, build your net worth and create passive income for your retirement years. One of the largest benefits of this type of real estate investment is that there are legitimate expenses that can be deducted against your income when your tax is due at the end of the year.
These rules are always somewhat in a state of flux so it is important to keep updated on what is allowable and what is not. Deductions can come in many forms and it is important to know what relates to you and your rental property.
Allowable Deductions for a Rental Property
Fees and Dues
If you provide services such as gas and electricity in the cost of your rent, you can claim these expenses. This includes council tax and water rates as well.
According to Amal from Accountingpreneur “If you use an accountant to do your books or a letting agent to handle the administrative tasks of your rental property, these costs are also deductible against your rental income.”
Property and landlord insurance for a rental property are deductible against your rental income.
Renovation/ Repair and Maintenance Cost
This is an area that can be somewhat tricky. Repairs and maintenance for damages done to the property by tenants qualify as deductible by the HMRC.
Renovations, depending on the scope of the work, may not be an allowable deduction. Large renovations, such as a new kitchen or bathroom, would fall under “capital expenditures” and are not allowable as a deduction against rental income. They are, however, allowable as a deduction if you sell the property for a profit, against your capital gains tax. This means that it is important for you to retain all documentation of work done, even if you can’t use it against your rental income for that year.
Smaller renovations, such as redecorating for a new tenant, may be allowable. Keep in mind that expenses incurred while changing your home from a personal residence to a rental property are not allowable because they are deemed personal expenses from personal use of the property. However, if you buy a property for the purposes of renting it and redecorate it, or if it is redecorated in between tenants, that would be an allowable expense.
The repayment of your initial loan is not deductible. The cost of financing that loan (the interest payments) is eligible and qualifies as a legitimate expense.
Wear and Tear
Wear and tear rules have changed recently from what was once a 10% flat rate (10%of rent could be deducted for wear and tear), to a Replacement of Domestic Items Relief plan. This plan allows you to deduct the cost of items that need replacing on an item-by-item basis. If you need to replace a fridge or washing machine, that is eligible. You cannot claim “upgrades”, the items need to be replaced like for like. Any proceeds from selling said items must also be claimed against the cost of the replacement item.
Administrative Costs/ Travelling Expenses
Paper, phone bills, postage and other administrative costs may be deducted, granted they are used solely for your rental income and property business. If you travel to and from your properties, your travelling costs are also deductible from your rental income, such as your mileage (up to allowable limits).
Maximize Your Deductions by Knowing What Is Allowable
As you can see, the list is long and it isn’t always as simple as black and white. Stay on top of policy changes and always make sure to file your taxes on time, every year. By keeping up to date, you can save yourself thousands of pounds with legitimate, allowable tax deductions, thanks to your rental property.