Top 15 Tax Deductions for Landlords
Top 15 Tax Deductions for Landlords
Paying taxes isn’t fun for most business people, but it is a necessary or compulsory part of life. As a landlord, paying your taxes doesn’t have to be a bitter pill to swallow, because federal law allows you to take advantage of a number of tax deductions on your rental income. This article seeks to explore some of the top fifteen tax deductions you could benefit from as a landlord.
Taking advantage of these deductions could make the difference between gaining a sizeable amount of income on your rental property, and losing it. There are some rules every landlord has to follow if they want to take advantage of these deductions, the crucial one being that you can only deduct necessary and ordinary expenses.
An ordinary expense is one that is accepted and common in your industry, such as paying contractors to repair a leaking roof. On the other hand, an expense is deemed necessary if it is appropriate and helpful in your line of business, such as advertising your premises so as to get tenants. It is important to keep proper and detailed records of all your expenses concerning your rental property, so as to make the deduction claim and process seamless. Below is an elaborative list of the deductions you can make as a landlord:
1) Depreciation of Assets
Depreciation of assets refers to the things that you have purchased for business purposes, which depreciate over time and whose use goes beyond the current tax year. There are three major types of costs that you can depreciate, these include:
• The value of the property (not the land, as land appreciates in value over time)
• The cost of any improvements done on the property such as replacing worn out carpets, countertops, roofs, appliances and more.
• Equipment, automobiles, laptops, and computers for business use.
These expenses are not deducted in a single year. They are spread over multiple years.
One of the biggest deductible expense you can make as a landlord is on any interest you accrue because of a loan or any other expense related to the rental property. For instance, if you took out a mortgage or loan on the property, then you can deduct the interest accrued on the loan/mortgage when filling your property’s tax returns. You can also make deductions on the interest accrued on your credit cards as a result of making payments related to improving or repairing the property.
Repairs are a necessary part of owning a rental property, because “things will always break.” Repairs help landlords keep their premises in good working condition, they are, therefore, deductible. Examples of repairs that can be deducted when paying tax include:
• Air Conditioning Repair
• Fixture Repairs
• Incidentals that are related to a repair
• Plumbing Repairs
• Labor Costs and Contractor fees
4) Travel Expenses
Both long distance and local travel expenses that are business related are deductible. For instance, if you use an automobile to travel to your premises regularly then the cost of maintaining the vehicle, the cost of gasoline and parking fees are deductible. If you use public transportation then you can deduct these expenses. On the other hand, if you have to travel by air you can deduct the cost of your air tickets.
5) Legal and Professional Fees
You can also deduct the amount of fees you pay for professional or legal advice/work. These include real estate agent fees, attorney fees, accountant fees, and the fees you pay other to professional advisors, such as structural engineers.
All insurance premium payments you make towards securing your business premises are tax-deductible, such as:
• Fire/ Liability and Damage Insurance
• Theft Insurance
• General Liability Insurance
• Flood Insurance Riders
• Homeowners Insurance
• Personal Umbrella Insurance
• Mortgage Insurance Premiums
• Workers’ Compensation Insurance
7) Management Fees
Managing your property can be quite a challenging task. For this reason, most landlords usually hire property managers or on-site manager to assist them: you are allowed to deduct these expenses, as well as those of other employees.
As a landlord, you will sometimes be required to pay fees to tenants or managers for referring potential residents to hire out your premises. The IRS recognizes these commissions as being deductible.
9) Office/Operating Expenses
As a landlord, you need somewhere to keep your documents, records and even work. Any commercial space you use concerning your property can be deducted. If you work at your home office, then you can deduct square footage. You should also deduct any other operational expense, such as:
• Pencils, Pens, and Staples
• Ink & Printer Paper
• Legal Forms
• Phone Bills
Some landlords use advertising as a way of getting their property occupied fast. All the different types of advertising costs can be deducted, so whether you use Craigslist, signs, and banners, online ads or newspapers to advertise include these costs in your tax deductions.
11) Maintenance costs
Maintenance is not the same as repairs. Unlike when doing repairs, you are not fixing any broken thing or item when doing maintenance. For instance, the lawn has to be regularly maintained by cutting grass, but the lawn does not break. Other types of maintenance costs include:
• Pest control and treatment
• Homeowner Association Fees
• Light Bulbs
• Landscaping and Tree Trimming
• Smoke Detector Batteries
• Pool Maintenance
• Janitorial Items
• HVAC Filters
12) Casualty and Theft Losses
If you happen to lose rental income because your property has been damaged or destroyed, then you can make a tax deduction on part of or all of your loss. Loses that occur all of a sudden as a result of flooding, fire or some other unfortunate occurrence, are regarded as being casualty losses. You can also deduct items lost as a result of theft.
The costs you incur in services can be deducted when making your rental income tax returns. If your tenants happen to reimburse you for paying a utility expense, you can still make a deduction. You will, however, have to claim the reimbursement made as income. Deductible utility expenses include:
• Water & Sewer
• Trash & Recycling
• Heating Oil
14) Start-up Expenses
A start-up expense is incurred even before a business has commenced. These costs are deductible, but they cannot be deducted in a single year because a start-up expense is still a capital expense (a cost that will benefit you for years and no just one year). $5000 is the maximum startup deduction you can make in the first year.
15) Passive Activity loss
Because you earn money from your real estate venture, it is regarded as a passive activity, in which losses incurred in this activity are deductible by up to $25,000 (special allowance). However, a landlord must actively participate in the real estate business to qualify for the passive activity loss deduction. For instance, you must be actively involved in management decisions including repair and maintenance decisions. You must also have at least 10% interest in the rental property, to qualify for this deduction.
One of the aspects that make’s the real estate industry quite lucrative is the income you can make from your property. The other lucrative aspect of this industry is the various tax deductions you can claim such as maintenance and repair fees, employee payments, stat up expense and more. It is important to be as accurate as possible when making these deductions to avoid encountering any problems with the IRS. Where possible, keep some form of record such as a receipt for evidence.