Owning rental properties can be a great way to earn money and it can quickly become your main source of income. But you have to be on top of your accounting, money, and taxes.
As a rental property owner, there are plenty of opportunities to save money. One of these ways is to take advantage of property tax deductions. There are certain tax deductions that any homeowner is eligible for, whether they rent out their home to others or not. However, landlords and rental property owners get to take advantage of a lot more deductions.
Make sure to check with an accountant or tax professional to find out which of these deductions you can take advantage of come April.
Find out more about tax deductions for property owners below.
Long-Distance Travel Expenses
If you’re an out-of-state landlord, you can deduct travel expenses that you collected while going to visit one of your properties. This can include car miles, air travel, or even train rides. You may also be able to deduct costs from accommodations while you were traveling to check on your rentals.
Short-Distance Travel Expenses
If you live in the same area as your tenants, you can still deduct the cost of traveling to check on your rental property. If you are a local landlord but use a car to check on your property periodically, you can deduct the cost of travel.
This can include gas, tolls, repairs, lease payments, parking, licenses, and other fees. You can either calculate your expenses or use the standard rate provided by the IRS.
In order to qualify for the standard rate, you have to use this form of deduction in the first year you used the car for rental-related travel. If you qualify for the standardized IRS deduction, calculate your expenses yourself as well to see which option gives you more money back.
Mortgage Interest
If you are still paying off a mortgage on your rental property, you are likely paying a bank interest on that mortgage. Anyone who owns a home can deduct the interest from their taxes.
If you’re a landlord, this deduction is especially important because it’s the largest amount you can claim. You can deduct the interest as a rental expense when you file your taxes.
Personal Property Tax
Depending on where you live, you might have to pay property taxes on items that you used for your business. Personal items used in managing your rental property can be depreciated at a faster rate than other items.
With the Modified Accelerated Cost Recovery System, appliances, carpeting, and furniture are depreciated over five years. Once this period ends, you can replace those depreciated items and start the accelerated depreciation process over again. More permanent items, like driveways, can be depreciated over 15 years.
Home Improvement and Repairs
If you have to perform maintenance on your property or choose to make improvements to your rental home, you can deduct expenses from these repairs from your taxes. Large improvements that increase the value of your property must be deducted over time, while maintenance costs can be deducted in one year.
Repairing a problem that existed before you bought the property, making the home larger, or making changes so that you can use the property in a different way than you originally intended are considered home improvement.
Additionally, rebuilding parts of the property is considered a home improvement and will need to be deducted over time.
Maintenance Costs
Maintenance costs do not fall into the same category as repairs.
You may pay for the pool to be cleaned or the garden to be landscaped periodically, even though the pool and the garden aren’t broken.
The general upkeep of your rental property is important for keeping its value high and your tenants happy. Any tools you purchase for maintenance can also be deducted, although they may also need to be depreciated.
Eviction Fees
Evicting a tenant is always going to be a stressful process. It can also turn out to be quite expensive for landlords. If you do end up having to take a problematic tenant to court, you can deduct legal fees and the cost of an attorney from your taxes. This can help alleviate some of the financial burden that comes with evicting a tenant.
The best way to avoid getting into this situation is to carefully screen all of your tenants. Performing background checks, speaking with former landlords, and getting information about prospective tenants’ employment and income allow you to find the best possible tenants and hopefully avoid ever having to take legal action.
Legal eviction processes can cost thousands of dollars, which is a huge hit, especially for new landlords or property owners with only one rental property.
Working from Home
If you have a space in your home that you use for everything related to running your rental property business, you can deduct costs for your home office. If you use a room or a section of your room exclusively for business purposes, whether you meet tenants there in person or online, you can get additional deductions.
You can calculate your available deduction by dividing the square footage of your home office by the total square footage of your house or by using a prescribed rate multiplied by the square footage of your office.
You can also deduct costs from home repairs if they affect your office space. You cannot deduct a home office if you also have an outside office or if you rent your office space to your employer.
Paying Employees and Contractors
If you choose to work with a property management company or frequently hire maintenance workers, you can deduct their wages from your taxes as a business expense. You can also deduct all of the expenses from business events, like holiday staff parties, and half of the expenses from things like meals with clients or business associates.
If you hire independent contractors like electricians or painters, they are not considered official employees of yours, so you don’t have to pay social security or take federal taxes out of their checks. If you pay them more than $600 in a year, you will need to file a 1099-MISC for them.
Losses from Natural Disasters
If something unexpected happens to your home due to natural disasters or emergencies like earthquakes or fires, you can claim the loss of all or part of your property on your taxes. If you have home insurance, you can only claim the amount not covered by insurance. If your insurance covers all of the costs, you won’t be able to claim anything on your taxes.
Insurance Costs
You can deduct fire, flood, and theft insurance that you have taken out for your rental property. As a landlord, you may also deduct the cost of landlord liability insurance and any health or workers’ comp insurance you pay for any employees you may have.
Depreciation
The IRS requires property owners to make depreciation deductions. Depreciation deductions are made on items, including rental homes, that you have owned for more than a year. Qualified items are deducted in small increments every year.
A rental property depreciates in just over 27 years, so every year you could deduct 1/27th of the cost of the property. Depreciation is required by the IRS, and can help you down the road if you choose to sell your rental property. When you claim depreciation every year, you avoid paying taxes on a benefit you’re not getting.
Current Expenses
The IRS allows rental property owners to deduct all of the daily operational expenses that are necessary for their business to function. This includes things like rent and utilities, but there are more on the list. If you purchase office supplies to be used for your business, those can be deducted too.
Some of the things mentioned previously on this list, like gas for the car you use for business tasks, are categorized as current expenses, as well. You deduct these expenses each year, which reduces your total taxable income.
Capital Expenses
Land, vehicles, and equipment are a few of the things on the list of capital expenses. Anything that contributes to the revenue potential of your investment property is considered a capital expense. The IRS considers these expenses investments in your business, and you can deduct them over a set number of years.
Use of Professional Services
If you hire an accountant, tax professional, or lawyer to advise you on aspects of your rental property business, you can deduct their fees from your taxes. If you pay to use a tax filing software instead of hiring an accountant or finance professional, you can deduct the cost from your taxes as well.
However, it’s a good idea to hire an accountant to help with your taxes because they will know the best ways to get you as much money back as possible.
Operating Expenses
Some of what the IRS considers to be operating expenses are already outlined in this article, like insurance and maintenance costs. You can also deduct any other expenses that are crucial for the operation and maintenance of your rental property business.
For example, if you pay for someone to help with advertising your property, you can deduct those costs. The expenses for these services have to be deducted in the year that you used them.
Bottom Line
There are plenty of fees that you just can’t avoid as a rental property owner. Maintaining, repairing, and protecting your property are all important parts of the job. Luckily, there are ways to get some money back on what you’ve spent each year on your business.
Hiring a professional to help you with taxes is a great way to make sure you’re getting as much back as you possibly can. There are also ways to avoid dealing with certain issues in the first place.
Avoid expensive legal fees and tiresome eviction processes by carefully screening all of your prospective tenants. Avoid having to make property repairs by doing scheduled property inspections. This will allow you to catch issues when they’re small and easier to repair.
There are lots of ways to increase your revenue as a property owner or landlord. Offering your tenants a secure, online option for paying their rent each month will also allow you to easily keep track of your rental income.
Creating an online portal for maintenance requests can also help you keep track of the expenses you’re spending each year managing your property.
Whether you choose to use software for rent payments and maintenance requests or not, make sure that you’re keeping detailed records of all the money going in and out of your rental property business.
In most cases, you will have to file a Schedule E form that includes all of your rental property deductions. However, if you live at your rental property at any point during the year, keep in mind that the filing process becomes more complicated.
Owning a rental property can be a very lucrative investment, especially when you know what can and cannot be written off as a business expense. Carefully screening tenants and taking care of your rental property, in addition to keeping records of everything related to your business, can all contribute to your ROI.
