When you ask most landlords why they decided to buy rental property, most will talk about the cash flow that their real estate generates each month. However, the tax advantages of owning real estate often fall under the radar.
These tax advantages took center stage last year when the media blasted then-presidential candidate Donald Trump for how little he paid in taxes. The subsequent investigation clarified that Trump’s low tax burden was a result of taking advantage of something called a “tax loss carryforward.” It might be a loophole, but it was perfectly legal—and it reminded us all that the federal tax code can be incredibly generous to property owners.
You should be taking advantage of these landlord tax deductions, too. Your accountant or tax attorney should be familiar with these write-offs. However, if you prepare your own taxes, be sure that you don’t overlook these 7 valuable landlord tax deductions!
Most landlords know that they can write off interest paid on their mortgage; but did you know that there are other types of interest that you can deduct, too? You can also write off the interest paid on credit cards, lines of credit, and other loans related to acquiring or improving your rental property.
For instance, if you put $4000 on your credit card to have new hardwood floors installed, you can write off the interest paid on that credit card. The principal that you paid (e.g. payments toward the amount that you borrowed) is treated differently—it is typically added to the basis of your property and depreciated over the standard 27.5 years.
Rather than taking a single, large tax deduction in the year that you bought your rental property, the IRS forces landlords to write off the cost of the building over a period of 27.5 years (which is sometimes referred to as the “useful life” of a property). This means that landlords can write off 1/27.5 of the cost of their property each year.
Whenever you make improvements to the property, these can also be depreciated over time. It is important to distinguish between “repairs” and “improvements.” Improvements are updates that add value or utility to a property, such as adding a garage, installing central air, or renovating a bathroom or kitchen. Repairs, on the other hand, are considered property maintenance and can be written off in full in the same year that you spend the money. Replacing broken windows, fixing leaks, or installing a new hot water heater are all considered repairs. A good way to differentiate between repairs and improvements is to think of repairs as necessary for the tenants to occupy the unit, and improvements as upgrades that are nice to have.
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Any time that you travel for the purpose of tending to your rental property, you can write off the expenses. This includes both local travel (e.g., collecting rent checks, going to your unit to make repairs, traveling to the hardware store for supplies) and long-distance travel (including airfare, hotel rooms, and rental cars) if your properties are located farther away. To qualify as a write-off, at least 50% of your time must be spent doing business-related activities while away on long-distance travel.
Most people don’t realize that they can also deduct the costs that they incur while looking for properties. If you’re a landlord in the Boston area but have been considering rental property in Florida, you can technically write off any travel to Florida. Once again, you must spend at least half of your time there looking for property. It is smart to keep detailed records from your trip in case you are ever audited by the IRS.
#4: Employees & Independent Contractors
Whenever you hire someone to perform services related to your rental property, you can deduct their wages or fees as a business expense. This is true whether the person is an employee of your company (such as an in-house rental broker) or an independent contractor (such as a repairman).
#5: Legal & Professional Services
Related to the point above, don’t forget to deduct any fees paid to attorneys, accountants, property management companies, real estate investment advisors, or other professionals. You can write off these fees as operating expenses as long as the fees are for work related to your rental portfolio.
Any costs incurred for advertising can be written off, whether that advertising was for your rental property business (generally) or to advertise a property (specifically). This could include classified ads placed in newspapers, fees paid to apartment listing websites, postage for mailers, or signs placed at your properties around town. One of the biggest advertising expenses that landlords often overlook is the cost of building a website because they’re seen as “a cost of doing business”—so don’t forget to write them off!
#7: Home Office or Workshop*
This landlord tax deduction requires a giant asterisk. Landlords may be able to deduct their home office or workshop from their taxable income, provided that they meet certain requirements. This would include the space devoted to your work, as well as any furniture, technology, utilities, and tools needed to do work in that space. HOWEVER: We urge all rental property owners to exercise extreme caution before claiming their home office or workshop as a deduction, as this can often be a major red flag for the IRS, triggering an audit. Be sure to follow the rules very closely. Unsure whether your home office or workshop qualifies as a deduction? Consult with a tax attorney.
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Taxes Don’t Have To Be Stressful for Landlords
Most people dread tax season, often with good reason. Preparing your taxes requires sifting through receipts, credit card statements, loan documents, and other files. If you haven’t kept organized property accounting records throughout the year, the process can be particularly grueling. However, try to stay positive: Being a landlord gives you so many tax benefits! Flag these 7 landlord tax deductions to make sure that you’re taking full advantage them.Read more on Accounting & Taxes
See More in Accounting & Taxes