Filing and paying taxes is a complicated affair that gives millions of Americans across the country a hard time each year. There are plenty of things to keep in mind, from calculating all your income throughout the year to various deductions to consider.
As a rental property owner, you make profits thanks to your business. However, as you most definitely know, it is not all rosy — you do have to devote a significant amount of your income to paying off property managers, buying landlords insurance, and keeping your rental in tip-top condition.
The good news is that you can save some significant money while paying your taxes thanks to various tax deductions. As a landlord, you are in a position where you can enjoy tax breaks both as a regular homeowner and a rental property owner.
Here is a list of common tax deductions you should take into account:
Mortgage Interest Expenses
Let’s start with one of the most significant expenses you can possibly deduct from your taxes as a landlord: mortgage interest expenses. If you’re still paying off a mortgage for your rental, you can enjoy the tax break and deduct mortgage interest from your taxes as a landlord. What’s more, you can write off interest if you took a loan to repair your property or even used your credit card for it.
As you know, interest paid on a mortgage can be as high as thousands of dollars per year, so this deduction can become a game-changer for many rental property owners!
Education and Self-Improvement
Suppose you’ve already started your career as a landlord and have one or more properties under your belt. In that case, you can deduct any expenses which relate to your education or improving your skills in the real estate business, such as online or university courses, books, or seminars.
Note that you can utilize this tax break only if you already run the business, not if you are planning to start your career as a landlord.
Home Office Expenses
The ability to deduct taxes if you’re running your business from home is especially relevant after the recent shift to remote working due to the coronavirus pandemic. Luckily, if you want to go with this option, you don’t even have to have an entire dedicated room, rather simply a space in your home you use to work. What’s more, the cost of any software or subscriptions you use to run your business is fully deductible, as well.
Of course, as with all deductions, there are certain conditions and rules you have to comply with to be eligible. We recommend reading the IRS guidelines on the topic of home offices carefully, or consult your financial manager or a certified accountant if it feels like too much to take in.
Two of the most fundamental aspects to know about deducting home office expenses are:
- Your home office has to be used as a principal place of business.
- It also has to be the exclusive and regular place of meeting with clients and customers.
It is also worth knowing that if you go to meet clients or partners or run other business-related errands from your home office, you can deduct taxes for local transportation. Typically, your trip from home to, let’s say, a meeting with the property manager would be considered a personal expense. This is not the case if you have an officially established home office.
We have already touched upon how it is possible to deduct costs of local transportation if you use your home office as a place of business. However, there is another travel-related tax deduction you should know about as a rental property owner. If you have to travel long-distance to check out your properties, you can deduct a significant number of your travel costs.
Examples of deductible expenses include:
- Airplane, train, and bus tickets
- Costs of taxis and car shares (e.g., Uber, Lyft)
- Car expenses (for example, the cost of gasoline, parking meters, and tolls, if you use your personal car for these trips, or the cost of a rental car)
- Lodging (hotel, motel, Airbnb, etc.)
- Business meals.
These are just several examples of the vast list of tax-deductible travel expenses. One piece of advice: make sure you’re careful. Don’t get carried away writing off expenses willy-nilly. If you happen to spend one day out of four dedicated to your business trip simply for sightseeing, expenses during this day will not be tax-deductible.
To be safe, keep all your receipts!
Depreciation is another significant expense you can deduct from your taxes being a landlord and not an average homeowner.
First, we want to make you aware that depreciation covers only the properties and not the land they stand on. If you rent out a house with land, you’d have to separate the cost of the house from the cost of the land. The reason for this is simple — the land does not wear down, but buildings upon it do.
There are two systems to use when it comes to depreciation deductions: GDS (General Depreciation System) and ADS (Alternative Depreciation System). Most landlords use the GDS version unless they have grounds to use ADS. Again, if you believe that you might be qualified for ADS, you should carefully read up on the topic or seek professional advice.
According to the IRS, the value of a rental property is depreciated over 27.5 years. So, if you own a rental condo with no land in sight that you bought for $200,000, you can get an annual deduction of $7,272!
Also, if you use any equipment to manage your property or decide to reconstruct the place to make it more appealing to future renters, you can write off some of these expenses over the next few years as depreciation.
Insurance is yet another example of tax deductions available solely to landlords and not regular homeowners. You can use this tax break to save some money on the premiums you pay for the insurance, such as homeowners insurance, flood and fire insurance, and general liability insurance. What’s more, if you have any employees, their health insurance is fully deductible from your taxes.
Maintenance and Repairs
Having a property means you have to constantly keep an eye on it and maintain it in good condition. Here, it is also more profitable in terms of tax deductions if you are not a regular homeowner but a landlord.
You can deduct from your taxes the full cost of repairs made on your property as a rental expense. This includes the cost of materials, labor, and maintenance. Also, any maintenance expenses you’ve had in between tenants fall within this tax break as well.
In the case of maintenance and repairs, you should keep in mind that your expenses have to be reasonable and justified – you can’t replace a perfectly working faucet just because you want to and deduct those costs.
We recommend you to be careful here as well — according to the IRS, the cost of improvements of your rental cannot be deducted under this provision. Instead, they are deducted through depreciation.
A good example of repairs and not improvements would be replacing a leaking rusty faucet, repainting the walls (when necessary), and pest control.
The best option for you would be to save all receipts and invoices and go through them later by yourself or using your financial accountant’s help to see under which category it falls.
Employees, Contractors, and Professional Fees
Finally, you can use a tax break for the fees of professionals you might have turned to for any advice or assistance. For example, you can deduct fees paid to a real estate attorney, property management company, or even an accountant.
The same applies to any independent contractors you had to hire during the year. For example, if you had to contract a painter to freshen up the walls of your rental in between tenants or used the services of a professional cleaner, those are some substantial deductions.
And, of course, if you have any employees, such as a property manager or administrative assistant, their wages and salaries can be fully deducted from your taxes, as well.
Well, these are just a few examples of how to save money when filing your taxes as a landlord. As you see, sometimes it gets tricky, so make sure to consult a professional accountant if you feel like you need some guidance! Good luck filing your Schedule E with tax returns!