You wouldn’t dream of voluntarily overpaying your water and sewer bill. So why pay more taxes than you need to on your rental income? Sadly, millions of landlords are not aware of all the tax benefits available and overstate their income. Don’t feel too bad if you’re one of them. Rental properties provide more tax advantages than just about any other investment today.
Don’t leave a tax deduction unclaimed. Here are the top legitimate tax deductions for rental property owners. You will not want to miss out on it.
It’s said that you have to spend money to make money, and that especially rings true for landlords. Between travel costs, repairs, maintenance, property taxes, and insurance, you have more than your fair share of expenses as a landlord. Thankfully, there are many tax deductions available that can help you recover some of that lost income.
But how do you know which expenses the IRS considers to be tax-deductible? Consider this article your all-in-one resource for rental property tax breaks.
What expenses can you deduct on your taxes?
When you are a landlord, you run a company. You might have just one rental property, but your rental property is still considered a business. That means all deductible expenses, such as office space, supplies, and additional operating expenses, such as your home office, may still be deductible.
When filing your taxes, you must typically file Schedule E of your 1040. This form is not just to report your taxable income; it’s also where you typically report tax deductions. Here is a list of common deductions for landlords.
Taxes and rental income
Yes, you read that right. You can deduct your taxes on your taxes. It makes sense that you can deduct property taxes, but did you know that you can deduct state, county, and local sales taxes, too?
All of those trips to and from your rental property add up. Even if you live close to your rental property, it could still be a good idea to deduct the car mileage you’ve accumulated when collecting rent and inspecting and maintaining the property. For 2017, the IRS has set the standard mileage deduction at 53.5 cents per mile.
However, let’s say that you’re a part of the 50% of landlords that live far away from their properties. You’ll be able to deduct flights, car mileage, hotel costs, and whatever expenses you’ve accumulated on your way to and from checking in on your rental property.
The exception? If the purpose of your visit is to renovate your property. That’s under capital improvements, which we’ll get to in a minute.
Investment property and depreciation
Your largest expense as a rental property owner will be the actual cost of the rental property. Fortunately, you can deduct the cost of your property over time, which is what “depreciation” means.
Keep in mind that your property has to meet four requirements to be eligible for depreciation:
- You are the owner of the property.
- The property produces income.
- It is expected the property will last for more than one year.
- The property can lose its value (a.k.a. its determinable useful life).
You can learn more about the different types of depreciation here.
How to calculate depreciation
The cost of buying your rental property is a business expense and, as such, tax-deductible: a BIG one. The catch is you can’t claim it all at once. Landlords can deduct the cost of real estate through depreciation. Depreciation allows landlords to deduct a portion of the cost of their properties over several years. There are several depreciation methods. If the rental property was put in place after 1986, you would generally use the Modified Accelerated Cost Recovery System, MACRS, for short. Properties in service before 1987 will probably use the Accelerated Cost Recovery System (ACRS) or the straight-line method. Not sure how to calculate your property’s depreciation deduction? Find a tax preparation firm or use professional tax filing software. SuperMoney provides free expert and consumer reviews on the leading tax preparation companies and software products.
Repairs and maintenance for tax purposes
There is a fine line between what IRS agents consider improvements and what they consider repairs. Anything like a new roof, updating windows, or replacing the furnace; all serve to restore the property and are considered capital improvements. On the other hand, if you fix a gutter, replace a broken window, or paint your property — these are all considered repairs and are deductible in the same year.
Keep in mind that if you make these repairs as a direct result of an extensive remodel of your home, the whole project is subsequently considered a capital improvement. Don’t worry. Capital improvements are also deductible through depreciation.
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A major repair, like replacing the roof or windows, is considered a capital improvement and a deduction. You can deduct these expenses through depreciation. You can even deduct the interest on business credit cards when you use them to pay for ordinary and necessary expenses associated with your business.
When you’re the property owner, more often than not, lawn maintenance will be your responsibility. Some landlords even opt to make a deal with one of the tenants to do the work and deduct the “fair market value” for these services.
Regardless of how you pay for it, if the grass is mowed or hedges are pruned, these are all deductible costs. Please note that major overhauls to improve the curb appeal of your property will be considered a capital improvement.
Tax returns and Insurance
The cost of insurance is not a tax deduction when it’s for personal use. It’s a different story when you are running a business. The IRS allows you to deduct business insurance expenses. If you have employees, you can deduct their worker’s compensation and health insurance. Even if you’re just a one-person operation, you can still deduct almost any type of insurance you use to cover your rental property, such as fire, theft, flood, mortgage insurance, and more.
Rental utilities are a deductible expense if you pay for your tenants’ utilities from your taxable income. All utility bills are eligible, such as water, sewer, electricity, gas, etc… You name it.
Association dues on rental properties
The chances are that if your rental property is a condo, then you most likely have to pay homeowners association dues. The great news is that you can deduct association dues because they are actual expenses.
Legal and professional fees
Any legal and professional fees associated with your rental property are fair game for a tax deduction. Perhaps you used a tax accountant or consulted a lawyer for an eviction. Whatever the case may be, you’re able to deduct those fees.
You even get to recuperate your marketing costs. For example, if you paid for a print ad, Facebook ad, radio ad, or some other form of advertising, you can deduct the cost on your tax return.
Practically all insurance premiums you pay for your rental activity are fair game. That includes landlord liability, fire, theft, and flood insurance. It doesn’t stop there. If your rental business has employees — there were over 500,000 workers in the rental business in 2015 — you can deduct their workers’ compensation and health insurance.
We already mentioned that credit card interest could be a valid deduction, but the same applies to most types of interest. This includes:
- Mortgage interest.
- Personal loans.
- Credit cards.
- Home equity financing.
However, these loans must be used to either buy the property or for purchases related to the rental.
Has it been a bad year for your rental property? Did you spend more than you made? Your losses can also be deducted from your other sources of income. How much you can deduct depends on whether you spend most of your time in the real estate business.
Real estate professionals can deduct all their rental losses from all their income. Non-professionals can only deduct up to $25,000 of their losses against their overall income. However, rental losses that exceed $25,000 can be carried over to the next year.
What is considered a real estate professional?
The IRS defines real estate professionals as people who spend over 50 percent of their working time in the rental business and a minimum of 750 hours per year.
While owning a rental property is a stable source of income, slumps do happen. Maybe you can find an eligible tenant, but the mortgage payments don’t take a break. Or, it’s your first year in business, and there are a bunch of startup expenses to take care of. The government has your back where this is concerned because your rental losses can be a deduction on your taxes.
The amount you can deduct depends on whether you’re a professional landlord or a non-professional landlord, which really boils down to how much of your time you spend on your rental property.
There’s good news for you non-professionals, too. Any rental losses past the $25,000 cap can be deducted in the following year.
Management and broker fees
Some landlords find it more efficient to use a broker to help place tenants and/or a property management company to handle the day-to-day tasks associated with owning a rental property. You can deduct these fees (which is normally a percentage of the annual rent) on your taxes as well.
Keeping track of your expenses
Whether you use a tax professional or not, you can’t take advantage of the tax deductions if you don’t have proof of your expenses. What you keep track of depends on whether or not you have formed your own business entity.
If you haven’t done so and don’t have any employees, then all you need is 1) a record of your rental income and expenses and 2) supporting documents for your income and expenses.
You can use excel and Quickbooks to keep your records. It might be a good idea to get a receipt scanner or take pictures of receipts with your phone. That way, you’ll constantly be logging your receipts instead of taking hours to log them during tax season.
Want help filing your tax return. Compare tax preparation software products.
Having tax problems? Under audit? Tax relief companies can help you negotiate with the IRS.
Brandhyze Stanley is the chief voice of the award winning blog, Frugal-nomics.com; a platform designed to share with women how to live and look fabulous on a dime. A DIY girl at heart—Brandhyze has been featured on The View, The Early Show, The Today Show, InStyle Magazine, Essence Magazine, and MTVStyle. A Wilhelmina Model for over a decade, with a Business Degree from Loyola University Chicago, Brandhyze has been a contributor for the Huffington Post, Yahoo Finance, Manilla, Good Housekeeping, and Newsday Westchester, to name a few.