Tax Deductions for Landlords
The quickest way to reduce your tax owed is to own and operate rental property. Every dollar you spend on the property, whether it is mortgage interest, repairs, maintenance, business expenses, depreciation, is tax deductible. The IRS realizes this, so they have laid out firm, yet broad stipulations in which a rental property owner must follow when running their business.
To qualify for any of the deductions laid out below, the IRS requires the rental activity to qualify as a business for tax purposes. An individual must “engage in it regularly and continuously, primarily to earn a profit”. This is the case for all other business recognized by the IRS. This definition is a little vague! Luckily for rental property owners, the IRS established a “safe harbor” rule that is much more definitive. Under this “safe harbor” rule for rental property, owners must satisfy the following requirements:
- Keep separate books and records for each rental real estate property,
- perform 250 hours of rental real estate business each year, and
- document the services performed (a journal). You must be able to produce this under audit.
That’s it! So now, here are some ways to save on your taxes with your rental property.
1.) INTEREST FROM YOUR RENTAL PROPERTY LOAN
Assuming a landlord uses a mortgage loan to buy the property, which is recommended, mortgage interest will probably be their largest deduction. This deduction includes: (1) mortgage interest to purchase or improve a property, and (2) credit card interest accrued to purchase goods or services for the property. If you take out a loan for repairs on your property, all interest accrued can be deducted on your taxes that year, but you must be able to trace loan proceeds to the repair or improvement.
2.) DEPRECIATION
Depreciation is the realization of wear and tear over the “useful life” of a property, which may be longer or shorter than its probable real life.
3.) REPAIR & MAINTENANCE COSTS
While there are plenty of repairs and maintenance costs that go into renting real estate, the IRS demands that expenses be “ordinary” and “necessary” for them to be deductions. A quick list of possible deductions:
- SUPPLIES: Painting is usually the highest maintenance costs for landlords. All painting supplies, as well as any other supplies/tools for maintaining the property, are all deductible.
- SERVICE PAYMENTS: Cleaning service between tenants, landscaping, equipment rentals, labor costs (not yours, but hired and not for capital improvements), which is added to the improvement, are all deductible. Broken windows, leaky pipes, plumbing or appliance issues, furnace and air conditioning repairs (but not replacement); these are all deductible.
- CAPITAL IMPROVEMENTS: The IRS is very clear when it comes to what constitutes a capital improvement. If an improvement adds value to the property, or extends its useful life, it is considered a capital improvement and the cost is recovered over its “useful life” through depreciation. Capital improvements are usually depreciated over 27.5 years for residential and 39 years for commercial. Example: Replacing a kitchen faucet is a repair. Remodeling the kitchen is a capital improvement and the total cost will be depreciated. PLEASE NOTE: Wallpaper is a capital improvement; painting is a maintenance/repair item. New carpeting is treated as an improvement.
4.) PROPERTY MANAGEMENT EXPENSES
Do you want to invest in property but have no desire to manage property? Property management fees are 100% deductible. Any payments made to employees or contractors are deductible (you must file the proper 1099 & 1096 forms). Employees of contractors are their reporting problem.
5.) HOME OFFICE
If you use a room or dedicated space in your home for rental business, that might give you a couple more deductions. Figuring the deduction is computing the ratio of dedicated office space to the total square footage of your home. You can then deduct that percentage of your utilities, repairs, insurance, mortgage interest and depreciation. There is also a new “Simplified Method”, which doesn’t require you to total everything, just apply the percentage.
6.) TRAVEL EXPENSES
If your rental is located near your home, driving between the rental and primary residence may be deductible. Traveling from your home, to the hardware store to your rental is deductible, as is to the bank to deposit the rent check. However, the trip has to be primarily for the rental. If your rental is outside your home area, all travel to and from is deductible. Any airfare, hotel, rental car, meals, tolls, etc are deductible. A trip to the rental must be the primary reason for the travel, but an “incidental” trip to the beach is expected. However, two weeks there with no work performed is not deductible- in fact, it can void your rental property as a valid business. Note: The more diligent you are with your record keeping, the better you will be.
7.) LEGAL & PREFESSIONAL FEES
Any expenses incurred when using accounting or legal services, for the rental, are tax deductible. If these expenses are related to a specific property, they can be deducted from that property. Otherwise, professional fees can be deducted from the rental business as a whole. The fees to acquire or sell the property are treated as a capital expenditure and added to the cost to acquire or sell the property.
8.) START-UP COSTS
You can deduct up to $5000 of expenses in the first year of operating a rental property. Adding personal property such as appliances, furniture, landscaping equipment, etc. can be deducted using the de minimis safe harbor deduction. Now through 2022, 100% of personal property can be bonus depreciated in the first year (under2020 law).
9.) INSURANCE
Insurance premiums paid for your rental are tax deductible. This may include an umbrella liability policy, in addition to regular liability and fire, etc. If your rental operation is large enough to have employees, their health and workers’ compensation costs are deductible, as are the employees’ portion of their payroll taxes.
10.) ADVERTISING/MARKETING
Costs of listing your property on websites like Zillow or Airbnb are deductible as advertising. Also, any commissions paid to real estate agents or property managers to rent the property(ies) is deductible.
11.) UTILITIES
If you pay for any utilities for the property, they are deductible as well. These include water and sewer, electric, trash and recycling, internet and television, and security monitoring. Please note: If utilities are lumped into monthly rent, the landlord must count that as income. From a business point of view, it is better to have the tenant pay utilities. They become very wasteful if the landlord pays for the utilities, but you have to maintain control if they are being paid like the rent!
12.) STRUGGLING TO SELL YOUR PRIMARY RESIDENCE
You can recover costs by renting and only report the excess as income- a loss is a personal loss and, unless a catastrophe, not deductible,
IRS Scam
Scammers have been perfecting the art of fraud for years. We at Lewis Financial Tax Service, LLC will be doing our best to stay abreast of the newest scams and alerts from the IRS. We will continually update our site to pass this information along to our clients and potential clients. You may also use the following link to stay up-to-date with all the current IRS scams https://www.irs.gov/newsroom/tax-scams-consumer-alerts
IMPORTANT: The IRS will never initiate contact with taxpayers via email about a tax bill, refund or Economic Impact Payments. This includes the agencies assigned to collect past due balances with the IRS.
There is currently a fake “IRS” email making the rounds and it is targeting Microsoft Office 365 users. This email is claiming it has been sent to collect payments and will even threaten to take legal action. This scam is even more convincing than most because it appears to originate from the “irs.gov” domain.
This scam, as with most of them, imply a sense of urgency to the matter. This can cause individuals to act rashly and pay off debts to avoid arrest. In this particular instance, the fraudster claims to already have made attempts of contacting the individual and the case is escalating. Even gong so far as to saying, “And our apologies that this notification will also be sent to your current employer.”, implying that made-up outstanding amounts will be legally withheld out of their wages. It even has fabricated account numbers, loan numbers and balance due amounts. They use specific information to strengthen the aura of legitimacy of the attack. "We have sent you this warning notification about legal proceedings in May 2019. But you failed to respond on time," the messages say. "This time, if you fail to respond then we will register this case in court. Consider this as a Final Warning."
There is a giveaway, however, as is the case with all scams. A closer look shows the emails' header is actually "shoesbagsall.com." Not only that, the “reply-to” field redirects the replies to “legal.cc@outlook.com”.
To see all of the security measures taken by Lewis Financial Tax Service, LLC
Tax Law Changes for 2020
2020 has been a one-of-a-kind year. Everyone has been affected in some way or another. No matter how this year ends, or if he just morphs into next year, there are only two things in life you can count on…death and taxes. So as “generous” as the government has been (or hasn’t been) this past year, their “payday” is right around the corner. It’s not all bad, though; most of the tax law changes are still aimed at easing the economic impact of the pandemic as well as expanding opportunities for increasing retirement savings.
Below are the most prominent to date. Check back with us at Lewis Financial Tax Service, LLC for other changes specific to you and any additions that will undoubtedly come with a new President.
(Disclaimer: The following is a list of items that have changed the tax law due to the passing of the SECURE Act, CARES Act, and others. Once the Presidency changes hands in January, there will likely be other tax law updates.)
2020 Recovery Rebates
Also known as the “stimulus checks”, it was more specifically a rebate for 2020 that was paid early. Receiving any amount of payment will not reduce your refund for the 2020 tax year. However, if you didn’t qualify for the rebate, or only received a partial “phase out” amount, that amount could be increased if your income was different in 2020 as opposed to 2019 OR there was an added dependent.
Charitable contributions
Nonitemizers can claim up to $300 in charitable cash donations. For itemizers, the limitation of 60% of your modified income has been pushed to 100% for cash contributions. It remains at 50% for non-cash items
Educators
Teachers who don’t itemize, can claim $250 in educator expenses this year. If two educators are married and filing jointly, that number is $500. (These expenses must be unreimbursed.)
Self-Employed Family and Medical Leave
Self-employed individuals can receive a credit against the Self Employment Tax. This applies if you were forced to quarantine based on federal, state, or local order, or medical advice; or if you were caring for someone who met those conditions; or caring for a son or daughter whose daycare had been closed due to Covid-19 precautions. The amount varies so much that it would be best to just contact us so we could discuss it.
Employers Paid Family and Medical Leave
This is too in-depth to begin to discuss here. However, we are up to speed with every aspect of the Families First Coronavirus Response Act, so please contact Ryan for a FREE consultation.
Required Minimum Distributions (RMDs)
The RMD rules have been waived for certain plans and IRAs for 2020. The required beginning date for RMDs has changed from 70 ½ to 72 for individuals turning 70 ½ after 2019.
Retirement Early Distributions
The 10% early withdrawal penalty has been waived for distributions up to $100,000 from IRAs and 401(k) plans. These distributions must be made between January 1, 2020 and December 31, 2020.You can elect to have the income from these distributions taxed over a three-year period, and you may also elect to recontribute the funds to an eligible plan within three years without regard for that year’s cap on contributions. Please note: the CARES Act provision must be included in your plan.
Traditional IRA Contributions
The maximum age limit of 70 ½ has been repealed.
New Standard Deduction (Update for inflation)
While only 13.7% of Americans now itemize following the JCJA in 2018, the IRS continues to increase the Standard Deduction each year for inflation. (Reminder: You don’t have to itemize to claim the $300 charitable contribution discussed above) Tax Year 2020 table:
Single: $12,400 (+$200); $14,050 if over age 65
Married Filing Joint: $24,800 (+$400); additional $1,300 each individual over age 65
Head-of-Household: $18,650 (+$300); additional $1,650 each individual over age 65
Standards Mileage Rates
Business: $0.575 per mile
Medical & Military Relocation: $0.17 per mile
Charitable: $0.14
Others
There are many more tax tables that have changed that are more specific to certain clients and would be too in-depth for the purpose of this entry. Please reach out to us regarding any other tax tables that may apply to you. Contact US.
What Does the Tax Cuts and Jobs Act (TCJA) Mean For Landlords?
In 2018, the TCJA was passed with mixed reviews. It benefited some, while others thought it would cause their refund to shrink. (For the most part, it didn’t) Here we will lay out some of the perks that Landlords received because of the TCJA.
The biggest news for small business owners was the 20% pass‐through deduction. This applied to a vast majority of individuals who ran their rental business as a sole proprietor, limited liability companies (LLCs), or partnerships. With these entities, any profit earned from rental activity is “passed through”. If your rental activity qualifies as a business for tax purposes (see below), rental owners may be eligible to deduct an amount equal to 20% of their net rental income. This is in addition to other rental‐related deductions. Put another way, they will effectively be taxed on 80% of their net rental income.
“WHO” QUALIFIES?
To receive the 20% tax deduction, you must meet both of the following qualifications:
- You operate your rental business as a sole proprietor, LLC owner, partner in a partnership or S‐corporation shareholder, and
- your total taxable income from all sources, after deductions, is $163,300 (filing single) or $326,600 (married filing jointly).
- You do not need to itemize to receive this deduction. If a taxpayer is above the income threshold, the amount of the deduction begins phasing out at these amounts and the deduction will be ZERO once the income reaches $213,300 (single) or $426,600 (married filing jointly). If a taxpayer exceeds the maximum threshold, you may still be able to claim the 20% deduction, However, your deduction cannot exceed:
- 50% of the W‐2 wages paid by the business
OR
- 25% of the W‐2 wages paid by the business plus 2.5% of the unadjusted basis of the business’ qualified property.
“WHAT” QUALIFIES?
As stated above, to receive this deduction, your rental activity must “qualify as a business for tax purposes”. For any activity to be a business, an individual must “engage in it regularly and continuously, primarily to earn a profit”. However, the IRS has created a “safe harbor” rule for this pass‐through deduction. Under this “safe harbor”, a rental activity is deemed a business if it meets the following standards:
- Keep separate books for each rental real estate you own,
- perform 250 hours of real estate rental services each year, and ∙ document what rental real estate activities are performed (a journal).
ANYTHING ELSE?
In the past, rental property owners were unable to deduct the cost of personal property used in residential units. Landlords scored a major victory when that was repealed in the TCJA. Landlords can now use bonus depreciation to fully deduct the cost of personal property all in the first year put into service. Personal property items include appliances, laundry equipment, gardening equipment and furniture.
Listed property must be used over 50% of the time for business to qualify for bonus depreciation. Listed property includes cars, TV’s and other entertainment property. Computers used to be on this list but are no longer. Therefore, you do not need to use a computer 50% of the time for business to qualify it for bonus depreciation. But if used less than 100% for business, the bonus percentage will also decline.
Saving for College
SAVING FOR COLLEGE
For school year 2019-2020, the average price PER YEAR for college was $21K for an in-state student at a state school. For private schools…$50,000!!! For the past ten years, these prices have been inflating an average of 5% EACH YEAR! If that trend continues, projected tuitions in the future will be:
FIVE YEARS: $28,000 (public, in-state); $63,600 (private)
TEN YEARS: $35,750 (public, in-state); $81,000 (private)
FIFTEEN YEARS: $45,600 (public, in-state); $103,700 (private)
No matter the years you have available to prepare, this is a daunting task. For some, college tuition may accumulate to be larger than their home purchase! Congress realizes this and has offered some “help” if you can call it that. Below are options for investing for college and common tax-specific pros and cons associated with each. (Stay tuned for more help with a new First Lady and HEW Secretary)
(NOTE: The information below is a detailed account of the tax benefits of each topic. If someone is interested in investing in any of the savings accounts, or need advice as to which one, Don is the only member of Lewis Financial Tax Service that is licensed to discuss these matters.)
Coverdell Education Savings Account (ESA’s)
Coverdell ESA’s are not only used for post-secondary education, but they can also be used for K-12 expenses as well. These expenses include tuition, books, supplies, equipment, tutoring and special needs services. Unfortunately, there is an income limit ($95,000 Single, $195 MFJ). Not only that, but the maximum contribution per child is also $2,000/year. (This figure is reduced if you claim an education credit on your income tax return.) This is calculated per child NOT per contributor. If one goes over that $2,000 per year, per child threshold, penalties will be owed. Be aware, since the contribution limit is so small, any “maintenance” fees charged by your financial institution will have a large impact.
When using an ESA, the parent/guardian/family member is the custodian, the student is the account holder. Therefore, they can withdraw money at any time, but it will come with tax and penalties owed. If they decide not to go to college, the money belongs to the child, albeit the balance must be withdrawn before the child turns 30, otherwise tax and penalties will be due.
529 Plans:
529 plans are tax deferred and distributions are not taxed if the distribution goes toward a qualified education expense. These education expenses include tuition, fees, books, supplies, equipment, computers and sometimes room and board. The IRS also allows tax-free withdrawals up to $10,000 per year for K-12 tuition; the plan does not cover any other K-12 expenses. You may also take tax-free distributions to repay student loans!
Similar to a Roth IRA, 529 plan contributions are post-tax and therefore not deductible from federal income taxes. Some states offer deductions or credits, but North Carolina and Kentucky, among others, do not. The SECURE Act of 2019 allows tax-free distributions up to $10,000 per borrower (This is the lifetime limit). If the child doesn’t use all the funds, you will once again pay income tax and a penalty on the earnings portion of a non-qualified withdrawal. The penalties will be waved if the beneficiary receives a tax-free scholarship or attends a U.S. Military Academy. The balance can be transferred to another family members, such as cousins, grandchildren or even spouses, as the beneficiary.
529 plans can also be used for room and board as long as the student is enrolled at least half-time (6 credit hours per term). If the student resides on campus, those expenses cannot exceed the amount charged by the school. If the student lives off campus, room and board expenses are limited to the “cost of attendance” figures provided by the college.