Business Tax

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:

1. 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.
2. 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.
3. 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,

by @wesomeWG