Optimizing property insurance payments for tax purposes

Question

I own a residential rental property in the United States. I recently received the bill to pay the property insurance on it. The bill can be paid in full this month, or I can pay it in monthly installments. If I pay in monthly installments, there is an extra fee of $60 per year, or $5 per monthly bill.

My expenses for the rental property in 2018 have exceeded the rent I've collected this year. Therefore, any further expenses associated with the property during this calendar year are effectively not tax-deductible for me.

For that reason, I was thinking of paying the insurance bill in monthly installments. That way, most of the payments would occur in 2019, and could be deducted against the rent I expect to collect in that year. (I anticipate having many fewer expenses for the property next year than I had this year.) The extra fee I would have to pay to the insurance company would be outweighed significantly by the tax savings, I think. (I'm in the 25+ tax bracket, so I'd be saving about $250 in taxes on this ~$1000 insurance bill if it were all deductible, and that's not counting state tax.)

Does this make sense? And is this what I would have to do to get a tax benefit at this point? Or can I somehow deduct the bill against next year's income even if I pay it in full in this calendar year? I have the money to pay it in full now and would prefer just to pay it so I don't have to worry about it, but not if it means losing out on hundreds of dollars in tax savings.

Answer 1

I have two competing answers based on your described scenario:

1. Normally, if you take a loss this year, even if the expenses can't be deducted this year, you should be able to carry the loss over to next year (or continue accumulating yearly losses until you have a net positive year). In this case you would want to pay the bill all at once to avoid the split payment fees, and you can still deduct it all next year. (Note you can do this even for expenses that cannot be depreciated over multiple years.)

2. If #1 definitely does not apply in your situation, then you could make monthly payments (or one payment) that covers the amount through the end of this year, and then a single payment for the remainder of the bill at the beginning of next year. This way you minimize the fees while maximizing your deduction in the appropriate calendar year.

Answer 2

It has been a while since I owned rental property, but regarding the insurance I always had to split the cost between two years.

If I paid it in Full on November 1st, then 2/12ths of the bill was for this year, and 10/12ths was for next year. Of course the bill I paid last year, was used for 10/12th of this year.

Are you sure that your expenses are exceeding your rental income? The principal portion of the monthly payment can't be deducted.