Think your landlord has it made? Just wait until you find out about the tax breaks she’s eligible for. Owning a rental property certainly comes with its fair share of frustrations. When you consider what landlords stand to save on their income tax bills, however, you might want to give the job a second thought. Check out five ways property owners save during tax season.
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1. They Get the Mortgage Interest Deduction
Homeowners can deduct their mortgage interest for home loans with values of up to $1 million. They can also deduct some of the money they’ve borrowed that’s part of their home equity loan. But you don’t have to own your own home to get the deduction.
Landlords can take advantage of the tax break too by deducting the mortgage interest they’ve paid to buy or fix up their properties. This is typically the largest deduction that they can claim. When refinancing a property for more than it was worth originally, property owners can deduct additional amounts of interest and fees if the extra funds were used to improve or maintain the property.
2. They Qualify for Deductions Homeowners Don’t
Although there are many deductible expenses, deductions specifically for homeowners are limited. That’s not the case for landlords. Besides interest and mortgage points paid over the life of the loan, property owners can score deductions for different kinds of insurance premiums, including homeowners insurance and health insurance for their workers.
If you rent an apartment and you accidentally break something, you can’t get a tax write-off for covering the damage with money from your own pocket. But if you’re a landlord, you can deduct the cost of repairs that you’ve made for your tenants. Utilities like gas and electricity and property taxes that aren’t paid by the tenants are also deductible.
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3. There’s a Depreciation Deduction
Another special benefit for landlords is the tax break they receive for the breakdown of their properties over time. They don’t get to deduct the full value of depreciation all at once, though. Rather, they must deduct those costs over a period of time: 27.5 years for residential properties and 39 years for commercial real estate.
When it comes to the depreciation deduction, there are other IRS guidelines. Only the value of the property’s structure and depreciating items inside the property (like appliances and windows that must be replaced) count as deductible costs. Depreciation begins as soon as the property is ready to be rented and ends either when you stop renting it out or when you’ve recouped the entire cost of your investment, whichever comes first.
There’s a catch, of course. The value of the land that the property sits on cannot be deducted. So for a $250,000 house, a landlord could only deduct the value of the building, and not the land valued at $70,000. If they rent the house for 27.5 years, their annual deduction would be roughly $6,545.
4. Travel Costs Are Deductible
Property owners who make routine trips to check on their tenants aren’t inconveniencing themselves, even if they have to go the distance to get to their properties. After all, they can deduct their travel expenses. That includes the cost of taxis, parking fees and gasoline if they’re using their own cars to make the trek. Instead of deducting individual expenses for car travel, landlords can opt to use the standard mileage rate, which is set at 54 cents per mile for tax year 2016 (it will be 53.5 cents per mile for 2017).
If you’re a landlord who lives in a different state from your rental property, you can deduct the cost of rental cars, airfare and hotel rooms. Meals that you enjoy during your journey are deductible as well. It’s a good idea to tread carefully when it comes to deducting expenses for overnight trips, however. You could get audited by the IRS for deducting extra costs that you use to have fun while you’re traveling.
Related Article: 4 Questions to Ask Before Becoming a Landlord
5. Legal Fees Count as Deductible Expenses Too
Unfortunately, some matters can only be settled inside of a courtroom. Landlords who are forced to evict tenants or take legal action for any other reason have the upper hand, at least from a financial standpoint. Unlike their tenants, they can deduct court fees and attorney fees.
Property owners enjoy a variety of perks at tax time. As long as they keep up with their receipts and have documentation to support their deductions, they have the opportunity to substantially reduce their tax bill. If you’re thinking about becoming a landlord, the deductions we’ve mentioned might be enough to convince you to take the plunge.
Of course, it’s always a good idea to talk to a financial advisor before taking the plunge. Though the perks might be enticing, you want to ensure that buying a property aligns with your long-term financial goals. A matching tool like SmartAsset’s SmartAdvisor can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to three fiduciaries who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
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