Ugh! It’s almost that time of year again, the dreaded tax season. If you’re like me, there are few things I look forward to less than dealing with my taxes. But if we have to go through the dreary exercise of giving Uncle Sam his due, it’s smart to take every legal tax deduction possible.
Since rental real estate provides more possible tax benefits than any other investment, landlords need to be fully aware of their options. Often, tax benefits can make the difference between losing money and earning money on rental properties.
Here’s a comprehensive list of potential landlord tax deductions –
Interest Expense. This includes the interest expense paid on the property’s underlying mortgage and on interest paid on credit cards and loans used to acquire or improve a rental property. There are some wrinkles in interest deduction allowances, so be sure to carefully review this matter with your tax preparer.
Depreciation of Rental Property. The cost of a rental property is not deductible in full when you buy it, but it can be depreciated over the years. Be sure your tax advisor is depreciating your rental property to your maximum tax benefit.
Repairs. All repair costs are tax-deductible in the year they occur. Keep accurate records of every repair. Remember – repairs are not improvements. Improvements are handled differently for tax purposes.
Personal Property. The cost of your personal property being used in rental activity can be deducted in a tax year. What’s “personal property”? Things like appliances or furniture used in a rental unit. There are rules and limitations to these deductions, be sure your tax pro guides you through them.
Pass-Through Tax Deduction. Established by the Tax Cuts and Jobs Act of 2018, many landlords will qualify for this special income tax deduction. Depending on their income, landlords are allowed to deduct 20% of their net rental income or 2.5% of their rental property’s initial cost plus 25% of the amount they pay their employees. This deduction is set to expire in 2025. This one has some complications, so be sure to get professional advice when calculating this deduction.
Travel. When you drive to your rental property to deal with a tenant complaint or go to Home Depot to buy a new water heater, that mileage is a deductible expense. You can opt for deducting actual expenses vs. mileage expenses. If you need to travel overnight for rental activity, all of your travel expenses are deductible.
The key here is to keep accurate records. Be sure to log your miles and expenses as they occur.
Home Office. Provided you meet minimal requirements, landlords can deduct their home office expenses from their taxable income. This applies to the space you use as an office and any other workspace you use for your rental business.
Employees and Independent Contractors. When you hire people to perform services for your rental property, you can deduct their wages as a business expense.
Insurance. Any type of insurance you purchase for your rental activity is deductible – fire, theft, and flood insurance are only three examples. If you have employees, the cost of their health and workmen’s compensation insurance is also deductible.
Legal and Professional Services. Whatever you pay your lawyer, accountant, property management company, real estate advisor, and other professionals is fully deductible. These fees are operating expenses, as long as fees are paid for work related to your rental activity.
Here’s a few other “Need to Know” tax tips for landlords…
- Want to increase your depreciation deductions significantly? Use cost segregation.
- In some cases, you can rent out a vacation home tax-free.
- Most small landlords can deduct up to $25,000 in rental property losses each year.
- If you rent property to family or friends, you can potentially lose all of your tax deductions.
These tax deduction ideas should serve only one purpose – as the basis of a discussion with your professional tax advisor. Do not automatically assume that you do or do not qualify for any tax deduction based on this article. Do use this article as your “laundry list” of items to cover with your CPA or other tax preparer.
Sterling Property Solutions’ clients rely on us to handle all aspects of the property management equation. Most of them are busy people, with businesses and careers that require their full attention. They want to be involved and stay informed, but they also know that they do not have the time or expertise necessary to be hands-on landlords.
Our team can answer all of your property management questions and help you address any challenges. Please give us a ring at 914-355-3277 or send us an email at firstname.lastname@example.org.