Don't Miss Out On These Tax Deductions for Rental Property Owners
Rental real estate provides more tax benefits than almost any other investment, but often landlords don’t take advantage of every tax deduction available to them. These tax breaks can be the difference between making a profit on a rental investment or losing money. The IRS stipulates that deductible expenses must be ordinary and generally accepted in the rental business, along with being necessary for managing and maintaining the property. Below are twelve tax deductions landlords should utilize.
1) Interest: This is the most obvious one, and often the largest expense that can be deducted. Landlords can deduct mortgage interest paid on loans used to acquire or improve their rental properties, and also interest paid on credit cards used on goods or services related to their properties.
2) Employees & Independent Contractors: Landlords can deduct wages for employees such as property managers or grounds/maintenance workers. Independent contractors are also included in this, for example any tradesmen hired to do work at the property.
3) Depreciation: The value of your rental property will decrease over time, therefore you are able to deduct the cost of your property over the expected life of the property. To calculate how much can be deducted for depreciation, you’ll need to know the tax assessed value as well as what the IRS allows for each asset’s recovery period. The deduction will be divided by the asset’s designated recovery period until the total cost has been fully deducted. Rental property structures have a recovery period of 27 years.
4) Taxes: State, county, and city taxes, as well as occupancy taxes and licensing fees are all tax deductible.
5) Pass-through Tax Deduction: Starting in 2018, most landlords qualify for a new pass-through tax deduction established by the Tax Cuts and Jobs Act. Depending on their income, landlords may be able to deduct (1) up to 20% of their net rental income, or (2) 2.5% of the initial cost of their rental property plus 25% of the amount they pay their employees. This deduction is scheduled to expire after 2025.
6) Insurance Premiums: Any form of insurance is considered an ordinary and necessary rental property expense and thus, is deductible. This includes fire, theft, flood and landlord liability insurance. If you have employees, in addition to deducting their wages you can also deduct the cost of their health insurance.
7) Maintenance & Repairs: It is important to note that improvements to your property are not tax deductible, but repairs that are considered ordinary, necessary and reasonable are tax deductible. The cost of any repair work is fully deductible in the year in which it occurs.
8) Closing Costs: Closing costs are often tax deductible or can be depreciated over time as part of the acquisition cost.
9) Mortgage Insurance: If your loan to value ratio is too high, you’ll end up paying mortgage insurance on your loan. Luckily, you can deduct the cost from your taxable rental income.
10) Utilities: Gas, electric, water, HVAC, internet, cable, trash removal…if you pay for any of these for your tenants, they are tax deductible.
11) Professional Fees: All professional fees associated with your rental properties are tax deductible. Your bookkeeper, your lawyer, your real estate agent…make sure you don’t forget any! This also includes legal forms and tenant screening fees.
12) Travel: If you are a hands-on landlord that shows your own property to prospective tenants, or collects rent on-site or oversees repairs and maintenance, you can deduct the cost of traveling to your properties. You can deduct travel using two methods: actual expenses or the standard mileage rate. For 2019, the standard mileage rate for business use is .58 cents per mile.
Part of being a smart entrepreneur is being savvy with your tax deductions and making the most of your rental income. Make sure you’re documenting all expenses throughout the year so that when it’s time to turn everything into your CPA nothing gets overlooked!
I am not a CPA but I can connect you with the best and brightest CPA’s in South Louisiana. For more information or help with your rental properties, please reach out to me at firstname.lastname@example.org.