For some landlords, pride of ownership is the main appeal to purchasing rental property. For others, it’s the monetary benefits or security of owning investment property. Whatever your reasons for becoming a landlord, you want your business to be profitable. After all, who wants to pay out of pocket just to keep their business afloat?
So how can you minimize your expenses? One way is to make sure that you know what tax breaks are available to you as a landlord. Some tax breaks apply to homeowners, and you’ll certainly want to take advantage of those. Many are unique to rental property, so you’ll want to be up to speed on the special rules applicable to owning rental properties too.
Below, we’ve outlined 15 tax deductions that you should be aware of as tax season approaches. Of course, you’ll want to check with your tax professional or CPA to determine whether any specific tax deduction applies to you. Keep these deductions in mind as you make decisions about your rental property throughout the year.
1. Long Distance Travel
Moolanomy reports that if you have to travel long distance to check on your properties, you can deduct the cost of your travel expenses, such as expenses for car mileage, airfare, or hotel costs.
2. Mortgage Interest
This is one of the rental property tax deductions that most landlords are familiar with. If you didn’t purchase your rental property outright, you probably have a mortgage. If you do, you’re paying interest to a bank. According to SmartAsset, landlords can deduct their mortgage interest as a rental expense. This applies to all homeowners, but it’s important for landlords to take advantage of because it’s usually the biggest deduction they can claim.
3. Personal Property Taxes
You may be required by your local government to pay personal property taxes on equipment and furniture used for business purposes, based on the value of your personal property. Most landlords are aware that they can depreciate their property, but did you know that you can depreciate personal property inside the rental unit or used for your rental business at a faster rate? All Property Management explains that with the Modified Accelerated Cost Recovery System, you may save more money by fully depreciating personal property inside the rental unit over a shorter period of time. For example, appliances, carpeting, and furniture can be depreciated over a five-year period. Other items, like fences and driveways can be depreciated at a 15 year rate. You can check to see which asset class your property falls into on the IRS website.
When it comes to repairs, the IRS considers two different types:
- Improvements to the property (which increase the value) or
- Returning things to their original condition.
Bigger Pockets notes that while improvements must be capitalized and deductions taken as depreciation over time, repairs and maintenance costs can be expensed in a single year.
Nolo.com offers the helpful BAR acronym to help you decide if your repairs are simply maintaining the property or improving the property:
- Betterment - Does it fix a defect in the property that existed before you bought it? Does it physically enlarge or enhance the property in any way?
- Adaptation - Are you going to use the property in a new or different way than you originally intended when you purchased the property?
- Restoration - Does it rebuild the property to a like-new condition? Have you already taken a loss for the damage?
If you can answer yes to the above questions or your repair falls into any of these categories, it could be considered an improvement by the IRS and needs to be depreciated.
5. Local Travel
Many landlords like to routinely check in on their tenants and property. You might also need to handle maintenance, repairs, or improvements on-site. If you use your personal vehicle to make the trip, you can deduct the cost using two different methods:
- Using actual expenses or
- The IRS standard mileage rate.
FindLaw.com says there’s a caveat if you’re using the IRS standard method. In order to qualify, a landlord must use this method during the first year that the vehicle was used in rental business activity. When it comes to the actual expense method, you should know that it allows you to deduct the actual vehicle expenses, as well as depreciation.
According to the IRS, include gas, oil, lease payments, licenses and fees, repairs, tolls, and parking. Take a look at your deduction both ways to see which method benefits you most.
6. Legal Fees For an Eviction
Sapling says that if you are forced to evict or take legal action against a tenant, you can deduct court fees and attorney costs. However, total eviction-related expenses for property managers still averaged $3,500 in a TransUnion SmartMove survey. Even if some of those expenses can be deducted, it is still a cost to you.
There are also non-monetary costs to take into consideration, like the stress of an ongoing legal battle. So always think twice before entering into the eviction process. Also keep in mind that thoroughly and consistently screening your tenants can help you avoid eviction in the first place.
With a full SmartMove tenant screening package, you can get an in-depth look at an applicant’s background, including their credit, criminal and eviction history to make informed, timely screening decisions.
7. Home Office
If you use a space in your home to conduct rental business, it is a deductible expense (even if it’s not a whole room.) HomeGuides points out that it needs to be an area used exclusively for rental activity, and used as a primary meeting place for clients and customers. Money Crashers reminds you to keep in mind that the equipment must also be used exclusively for business. For instance, your computer shouldn’t be used to play games or for other personal reasons.
There are several ways you can calculate the business portion of your house as an expense in order find the largest deduction. According to Money Crashers, you can:
- Calculate your space’s square footage divided by the square footage of your entire house or
- If all the rooms in your house are roughly the same size, divide the number of rooms your business space encompassed by the total number of rooms in the house or
- Use a prescribed rate multiplied by the allowable square footage used in the home. For 2016, the prescribed rate is $5 per square foot with a maximum of 300 square feet.
Note that you can deduct a portion of your home repairs if they partially affect your office, and the full price of the repair if it only affects your office. However, you cannot use these deductions if you have an outside office as well, or if you’re renting the space to your employer.
8. Wages for Employees and Independent Contractors
If you hire a property manager or grounds maintenance worker, you can deduct their wages as a rental business expense. This also holds true for independent contractors like carpenters or electricians. According to Nolo, one of the benefits to hiring independent contractors is that you don’t have to withhold federal taxes out of their paycheck or pay one-half of the worker’s Social Security and Medicare taxes. You do, however, need to file IRS Form 1099-MISC if you pay them over $600 during the year.
When it comes to employees, Turbo Tax reminds landlords that meal and entertainment expenses for employees are often overlooked. For example, a holiday party or summer outing for your staff is 100% deductible. If it’s an expense incurred while doing business with a potential client or business associate, it’s 50% deductible.
9. Casualty Losses
If anything happens to your property due to an unexpected event like a natural disaster or fire, you can claim a total or partial property loss on your tax return. However, as Rentalutions points out, you can only claim losses to the extent that they aren’t covered by insurance. If you do have insurance, you must reduce the amount of your claimed casualty loss by any insurance recovery you receive (or expect to receive, if you haven’t been paid yet). Losses that are fully covered by insurance are not deductible.
Depreciation is a deduction you can take for property that lasts more than one year, and it must be deducted in small amounts at a time over a set number of years. For example, rental buildings are depreciated over 27.5 years. This means that you can deduct about 1/27 of your rental property annually.
SF Gate points out that depreciation is actually required by the IRS, so not only can this claim save you money, it might keep you out of hot water. Also, if you sell the property for more than the depreciated value, the IRS may charge you a 25% recapture tax, whether or not you actually claimed depreciation. It makes more sense to claim the depreciation than to eventually pay taxes on a benefit you never received.
According to B2R Finance, the premiums you pay for almost any insurance on your rental are deductible. This includes fire, theft, and flood insurance for your rental property, plus landlord liability insurance. If you have employees, you can also deduct the cost of their health and workers' compensation insurance.
12. Capital Expenses
Nolo offers some helpful information for understanding how landlords can deduct long-term assets, but we’ll go over the basics here. In terms of tax rules, there are two different types of expenses that are incurred as a rental property business: current and capital:
- Capital expenses are defined as purchases that are expected to last more than one year and generate revenue in future years. This might include equipment, land, or vehicles, but keep in mind these are not the only capital expenses. These purchases are treated as investments by the IRS, and must be deducted (or capitalized) over a number of years.
- Current expenses are the day-to-day operational expenses that keep your business running; for example, rent and utilities. You would deduct 100% of current expenses from your gross rental income in the year they are incurred.
13. Professional Services
We already mentioned that legal services can be written off, but this extends to hiring other professionals as well. Consulting a tax professional is not only advisable, it’s a deductible expense. According to Forbes, attorneys and accountants can be deducted from your taxes, as long as the reason you are hiring them is related to your rental business. Since IRS regulations are regularly updated or changed, hiring an accountant to file your taxes can keep you from overlooking any deductions available to you. If you do decide to handle your taxes yourself, the same deduction is applicable if you use tax preparation software.
14. Operating Expenses
Many items that you purchase for your rental property throughout the year can be classified as operating expenses and deducted in the year during which you purchase them. The IRS website defines these expenses as “the ordinary and necessary expenses for managing, conserving and maintaining your rental property”. Appropriate expenses that are generally accepted as necessary for a rental business might include:
You might be tempted to put maintenance in the repairs category, but the ongoing upkeep of your property doesn’t necessitate something being broken. For example, landscaping and pool cleaning is done on a regular basis, even when there are no major issues. You can also deduct any tools needed for cleaning or upkeep, such as lawnmowers, weed eaters, or paint sprayers. (It may be necessary to depreciate these tools, so check with a tax professional.) The same holds true for cleaning supplies and janitorial items. According to HOA Sites, you can even deduct Homeowner Association fees as a rental expense.
There are many potential tax advantages to owning rental property. If you make sure to take these fifteen landlord deductible expenses into consideration, you might find that owning a property can be manageable, profitable, and even enjoyable.