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Tax Benefits of Becoming a Landlord

January 28, 2019

When it comes to owning income property, there are a lot of clear benefits: cash flow, the opportunity to own an appreciating asset, and equity growth as your tenants help you pay down the mortgage.

But there’s another benefit that’s often overlooked: the chance for some pretty good tax breaks as well.   

For landlords, owning rental property opens up a myriad of tax deductions that are available –more than almost any other taxable investment. If you’re on the fence about buying rental property or if you own property and are just looking for ways to lower your tax bill this year, here’s a look at what you should know about available tax breaks and deductions for landlords.

 

Tax Deductions for Landlords

  1. Interest

Interest can prove to be a tremendously valuable deduction, and is usually a landlord’s single biggest deductible expense. Interest paid on the mortgage usually comprises the most significant deduction, but interest on credit cards that were used to pay for goods and services for the rental property are deductible as well.  

Note: Starting in 2018, the Tax Cuts and Jobs Act (TCJA) has limited interest deductions for landlords who earn more than $25 million from their rental property, however landlords can avoid this limit if they opt to depreciate their rental property over 30 years instead of 27.5 years. Learn more about deducting interest on rental properties.

2.  Depreciation

Depreciation is another significant deduction available to landlords. With depreciation, the IRS treats your rental property like it’s a depreciating asset, and allows you to claim back some of this “loss” in the form of depreciation.  To claim depreciation, you’ll want to take into account the cost of the structure itself, not the land –and then spread it out over a specific timeframe, usually 27.5 years. The contents of the building can also be depreciated, but over a much shorter timeframe –usually five years. Learn more about depreciation.

3. Taxes

Did you know that you can deduct taxes on your tax returns? Other taxes that you’ve paid throughout the year –including property taxes, state and city tax can all be deducted. If you have a mortgage out on the property, you can check your 1098 form to see what percentage of your payments went to taxes. If you’re free and clear of any mortgages (congratulations!), simply look up your tax records online if you haven’t kept a record of the amounts paid.

4. Pass-Through Tax Deduction

Since the Tax Cuts and Jobs Act was passed, most landlords now qualify for a new pass-through deduction. With this deduction, depending on your income, you may be able to deduct up to 20% of your rental income, 2.5% of the cost of your rental property, as well as 25% what you pay your employees. Just keep in mind that this deduction is set to expire after 2025.

5. Repairs and Maintenance

Good news if your rental is an older property –or just high-maintenance. Rental repairs –as long as they are considered to be “ordinary and necessary” and performed in the year in which you are claiming them, are fully deductible as well. So repairing a leaky roof, a broken window, and painting are all deductible.

Maintenance tasks –like lawn care, snow removal, HVAC services, and tree pruning also fall into this category and are fully deductible as well. Improvements, on the other hand, or things that will add to the value of your property are deductible as well, but not all at once –they must be depreciated over several years.

6. Travel

No, this doesn’t mean that your dream trip to Costa Rica is tax deductible! It does, however, mean that you’ll be able to deduct any travel to and from your rental property. Many landlords spend a lot of time traveling back and forth between their home and the rental, something that can add up significantly over time. And if you have a rental that’s out of town, these costs can add up even more quickly.

  • Long Distance Travel
    For long-distance landlords, airfare, hotel costs, and even 50 percent of your meal expenses can all be deducted. Just keep in mind that IRS auditors closely inspect deductions claimed for overnight travel so make sure you have proper documentation for your business trips and your intended purpose of travel before you claim it.

  • Local Travel
    For local properties, gas, oil, and vehicle upkeep are deductible. You can track your expenses yourself, or use the IRS’s standard mileage rate and claim a specific amount per mile.


7. Insurance

Insurance is a big part of owning rentals. But while you might not be thinking happy thoughts when the premiums come due, come tax time, you will be able to deduct the premiums for those policies. This includes any policy pertaining to your rental –so fire, theft, flood, liability, and even includes workers compensation and health insurance, if you happen to have employees, are all deductible.

8. Professional or Legal Fees

Any professional fees that are related to your property including accounting, property management, and legal fees can all be deducted as well.

9. Utilities

If you pay the utilities for your rental, they are also deductible. This includes electric, fuel, water and sewer, trash, and recycling. If you pay the utilities and your tenants reimburse you, then you can still deduct them but you’ll have to claim the reimbursement as income.

10. Employees or Contractors

If you have employees to help you run or manage your rental properties, or hire contractors to help with repairs, then their wages are deductible as well. This applies to both full-time and part-time employees.

11.  Passive Income Losses

Finally, losses that you incur may be deductible as well. If you earn under $100,000 you can deduct up to $25,000 in passive rental losses. The amount you can deduct will decrease if your income is over $100,000, capping out at $150,000. You must also actively participate in your rental business in order to qualify for this deduction.

Know the Rules

While it’s true that deductions can represent a tremendous savings for many landlords, it’s important to make sure you’re playing by the rules! The IRS has very specific rules in place regarding deductions, and you’ll want to ensure that you’re aware of any limitations that may apply. For example, if you live in your rental property or allow family members to stay there for part of the year, you may encounter limitations that apply to certain rental expenses, so make sure you’re clear on which ones you qualify for. If you’re not sure, you’ll want to consider enlisting the help of a good CPA to help you navigate your way through the process.

Double Check Your Numbers

The IRS can penalize you for any mistakes that are made on your return, so double-check those forms! The most common error when filing tax returns is bad math, so you’ll want to go over the numbers again just to make sure they add up before you file.

Keep Good Records

It’s important to keep good records of any and all deductions claimed. So keep those receipts! And keep them in once place so they don’t get lost. Should you ever get audited, these records will prove to be tremendously valuable.

Consider Filing an Extension

Finally, if you’re running short on time as the April 15th deadline looms, consider filing for an extension. This will give you until October 15, 2019 to finish your return. Just note that your extension won’t give you more time to pay your tax bill, just more time to file, so you’ll still need to calculate your estimated payment and pay it by April 15th –if you overestimate you can always get the difference back as a refund. As always, your extension must still be filed on time, by April 15th.

While tax time isn’t anyone’s favorite time of year, for landlords, there is a silver lining –the chance for some great tax breaks that just don’t come along with any other investment –all of which can help to reduce your tax bill significantly.

If the thought of paying taxes has you stressed every year, then you’ll want to consider enlisting the help of a good CPA. Not only will an accountant be able to help alleviate the stress of deciphering and completing tax forms, but they’ll also be able to alert you to deductions that you may not have been aware of, and ensure that you’re eligible for them, which could help you to save even more.

Remember: as a landlord, you don’t have to go it alone. By taking advantage of help that’s available you can help to alleviate much of the stresses and pitfalls that come along with landlording, and make your experience far more rewarding.

Be sure to have a look at Filing Your Taxes When You’re a Landlord for more information and tax tips.

Note: This article is intended to inform and to guide. It is not meant to serve in place of tax advice from a licensed tax professional or attorney. Please consult a tax professional for information about your tax situation and deductions that you’re eligible for.