Tax Advantages of Being a Landlord

by Cierylene Piernes


Posted on 2019-07-25 20:17:01


Tax Advantages of Being a Landlord

 

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Many landlords actually lose part of their rental income to pay their tax, because they fail to take advantage of the deductible expenses available for owners of rental property. Rental properties provide more tax benefits other than almost any other investment.

More often than not, these tax benefits make a difference between losing money and earning a profit from a rental property. Here are the tax deductions for owners of small residential rental properties:

 

1. Interest

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Interest is often a landlord's single biggest deductible expense. Common examples of interest that landlords can deduct include mortgage interest payments on loans used to acquire or improve rental property and interest on credit cards for goods or services used in a rental activity. Starting in 2018, the Tax Cuts and Jobs Act limited the interest deduction for landlords who earn more than $25 million from their rentals. But, said landlords can avoid this limit by agreeing to have their rental property depreciate over 30 years instead of 27.5 years.

Example of these interests are:

  • mortgage interest payments to banks and other financial institutions on loans used to acquire a rental property
  • mortgage interest payments to financial institutions on loans used to improve rental property
  • interest on credit cards for goods or services used in a rental activity, and
  • personal loans for any item used in a rental activity.

 

2. Depreciation of Rental Real Property

The actual cost of your rental house,  apartment building, or other rental property is not fully deductible in the year in which the property was purchased. But depreciation is the yearly cost of real estate property being a deductible expense over the number of years of the property’s “estimated useful life”.

3. Repairs

The cost of repairs to rental properties, (as long as they are used for necessary, ordinary, and in a reasonable amount) are deductible expenses in full cost, in the year they were incurred.

4. Local Travel / Car Expenses

The cost of driving that landlords do for most of their rental activities are entitled to be a tax deduction. For example, when you drive to your rental property to check on a tenant's complaint or go to a hardware store to buy materials for necessary maintenance or repair. If you drive a car, an SUV, a van, or a pickup truck for your rental activities(most landlords do so), you have two options for deducting your vehicles expenses. You can either (1) deduct your actual expenses (gasoline, upkeep, repairs) or (2) use the standard mileage rate (check with the IRS for the current rate). To qualify for the standard mileage rate, you must use it the first year you use a car for your rental activities.

5. Air/Overnight Travel

If you travel overnight for your rental activities, you can deduct your airfare, hotel bills, meals, and other expenses. If you plan the trip carefully, you can even mix landlord activity with pleasure and still take deductions. 

However, IRS closely monitor deductions for overnight travels and many taxpayers get caught claiming these deductions without proper records to back them up. To avoid unwanted attention from the IRS, you have to properly document your long-distance travel expenses.

6. Pass-Through Tax Deductions

The Tax Cuts and Jobs Act (TCJA) established a brand new income tax deduction for owners of pass-through businesses, which includes most landlords. If you qualify, you may be able to deduct up to 20% of your net rental income from your income taxes. This deduction begins for 2018 and is scheduled to last through 2025.

7. Personal Property

The cost of personal property used in a rental activity can usually be deducted in one year using the de minimis safe harbor deduction (for property costing up to $2,000) or 100% bonus depreciation which will remain in effect for 2018 through 2022. Such personal property includes appliances or furniture in rental units and gardening equipment.

8. Home Office

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When you use part of your home for business, you may be able to deduct expenses for what the IRS calls the "business use of your home." If you meet the technical requirements of the tax law, you should be able to deduct a percentage of many of the costs of running your home, such as utilities, rent, insurance, depreciation, mortgage interest, real estate taxes, and some casualty losses, repairs, and improvements (if they relate to the part of the house you use for business)

9. Employees and Independent Contractors

Whenever you hire anyone to perform services for your rental activity, you can deduct their wages as a rental business expense. This is so whether the worker is an employee (i.e., a resident manager) or an independent contractor (i.e., a repair person).

10. Materials and Supplies

You may deduct any materials and supplies you will have to use to perform any rental activity (i.e., office supplies, drinking water supply, etc)

11. Insurance

You can deduct the premiums you pay for almost any insurance for your rental activity. This includes fire, theft, and flood insurance for rental property, as well as landlord liability insurance. And if you have employees, you can deduct the cost of their health and workers' compensation insurance.

12. Legal and Professional services

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Lastly, you can deduct the fees you pay for professionals like Accountant, Lawyers, Professional Property Manager, etc. You can deduct the fees as operating expense as long as the fees you pay them for work related to rental activities.

If you are a landlord, you should carefully examine all your expenses in running a rental property, because you might be paying more tax more than you need to.


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