Being a landlord can significantly bolster your savings, but it’s also a lot of work. On top of the finances and responsibilities of your own living space, you have to find tenants, secure insurance and pay a mortgage and property taxes. Renting a home can also complicate your personal tax situation. Luckily, Uncle Sam allows you to deduct some expenses associated with running a rental property. 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. You can also work with a financial advisor who can help manage the tax and financial impact of your real estate holdings.
Deducting Your Mortgage Interest
Most homeowners use a mortgage to purchase their own home, and the same goes for rental properties. Landlords with a mortgage will find that loan interest is their largest deductible expense. To clarify, you can’t deduct the portion of your mortgage payment that goes toward the principal loan amount. Instead the deduction only applies to payments towards interest charges. These components will be listed separately on your monthly statement, and are therefore easy to reference. Simply multiply the monthly amount by 12 to get your annual total interest.
In addition to mortgage interest, you can deduct origination fees and points used to purchase or refinance your rental property, interest on unsecured loans used for improvements and any credit card interest for purchases related to your rental property. Come tax time, you must have already spent money on these purchases to qualify. Since it can be tricky to determine what counts and how to file these extraneous interest charges, consider consulting an accountant or financial advisor to help.
Deducting Your Property Taxes
Almost every state and local government collects property taxes. Depending on your rental property’s location, they can range anywhere from a few hundred dollars to hundreds of thousands. You can find the exact tax rate in your area by checking your escrow summary or inquiring with your tax professional. If your state has rental licensing requirements, you can also deduct any accompanying landlord or vacation rental license fees.
You should note that the IRS limits the deduction of state and local income, as well as sales and property taxes to a combined deduction of $10,000 ($5,000 for married taxpayers filing separate returns). This means you cannot deduct state or local taxes paid above the limit.
If you manage short-term rentals, your state, city, county or town may charge a kind of fee known as an occupancy tax. Very similar to sales tax, you can deduct occupancy taxes too. Speaking of which, if you pay sales tax on business related items, wage and social security taxes for employees or inspection fees, be sure to deduct those as well.
Deducting Your Insurance Premiums
Lenders can stipulate that homeowners get an insurance policy before securing their mortgage. Luckily, any form of insurance is considered an ordinary and necessary rental property expense and is thus deductible. The deduction applies to basic homeowners insurance as well as special peril and liability insurance.
If you have employees, you can deduct the cost of their health and workers’ compensation insurance too. Although insurance premiums tend to be a bit higher for rentals, this boost can help offset that. Landlords can also deduct losses, including those caused by hurricanes, earthquakes, flood and theft.
Deducting Your Home’s Depreciation
Over time, wear, tear and obsolescence lowers the value of your rental property and its contents. This process, known as depreciation, is tax deductible. You can claim depreciation as soon as your home or apartment is available for rent, even if you don’t have any tenants yet. The deduction can be taken for the expected life of the property, but it must be spread out over multiple years (Note that the IRS says rental properties can depreciate over 27.5 years.) Keep in mind, though, that the value of the structure can depreciate, but not the value of the land.
You can also claim the value of equipment that helps you run your rental business, like your computer or automobile, as well as improvements you make to the property that add value, adapt its use or extend its life. This could include installing a new roof, adding furniture or updating the household appliances. To qualify as a deductible expense, it must be expected to last for more than a year, be valuable to your rental business and lose value over time. IRS Publication 946, “How to Depreciate Property,” can help you navigate this sometimes convoluted process.
Deducting Your Maintenance and Repairs
While home improvements are deductible through depreciation, the tax code does allow you to deduct certain repair and maintenance costs separately. The big difference is that these efforts keep your property in rentable condition, but do not add significant value. According to the IRS, examples of improvements include additions (bedrooms, bathrooms, decks, garages, patios, porches), landscaping, heating and air conditioning, plumbing, insulation, interior upgrades (kitchen, built-in appliances, wall-to-wall carpeting, and other miscellaneous repairs (roofing, storm windows, security systems, wiring).
If you hire someone else to do the work, you can deduct the labor costs. The same goes for property or on-site managers, should you choose to hire one. If you take the “do-it-yourself” approach, you can deduct any rental fees for tools and equipment. Homeowner association and condo fees would are also deductible following the same principle.
Deducting Your Utilities
Every landlord handles utilities differently. If you choose to cover things like gas, electricity, water, heating and AC for your tenant, they’ll be tax deductible. If you pay for internet, cable or satellite, you can deduct those as a utility expense as well. Even if your tenant agrees to reimburse you for utilities later, you can continue to file the rental property deduction and claim the reimbursement as income.
Deducting Your Legal and Professional Fees
Landlords can deduct certain professional fees in relation to the rental property. If you use a CPA or computer software to prepare your tax return, be sure to deduct the cost.
Hire a lawyer to oversee rental paperwork at any point in the year? Deduct those exorbitant hourly fees. Use a real estate agent to find your tenants? Deduct the commission. Advertise the property in the newspaper, over the radio, or online? Deduct those ad dollars.
Even advisor services can be written off so long as you meet to discuss the rental property. If you have to evict someone, this deduction would help cover the legal and court filing fees.
These are all considered operating expenses, and should be deducted as such. You cannot, however, deduct legal fees used to defend the title of your property or recover and improve property.
Deducting Your Travel and Transportation
If you’re a landlord that travels to multiple properties or your rental is located far from your residence, your transportation expenses are deductible. This includes paying to show your rental property, collecting rental income and conserving your rental property throughout the year. Excluded from this policy, however, are any reasonable commutes made regularly.
You can deduct travel using two methods: actual expenses or the standard mileage rate. For 2020, the standard mileage rate for business use was 57.5 cents per mile.
Deducting Your Office Space
Whether you conduct business in a commercial property or the spare bedroom, you can deduct the accompanying costs. Square footage or rental cost will probably be the largest expenses. However, you can also include the price of a printer, computer software and anything else you use.
Keep documentation of the purchases you make and records for the time you spend managing your rental property. This is one of the most commonly flagged deductions. In turn, be sure you’re keeping yourself honest about the breakdown between business and personal use.
How to Claim Rental Property Tax Deductions
In general, you should file rental property tax deductions the same year you pay the expenses using a Schedule E form. The process will be much more manageable if you keep detailed records of all income and costs related to the property as they occur. Plus, if you’re ever audited, you’ll have to provide proof for every deduction you claim.
While we’ve reviewed several rental property tax deductions above, the filing process gets more complicated if you use the rental property as your primary residence at any point in a given tax year. Each year’s Schedule E form denotes the number of days that you can personally use your home and the percentage of days that the property can be rented out at fair market value before anything changes. In most cases, you won’t be able to deduct expenses or losses for personal use on the Schedule E. You may be able to file them using a Schedule A form if you choose to itemize your deductions.
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