When every penny counts, why would you want to pay more taxes than necessary? Most of the time, it’s because landlords aren’t entirely aware of all the tax deductions available to them as rental property owners. The surprising truth is that rental properties provide more tax benefits than nearly any other type of investment.
Understanding that, you should also know that understanding what benefits exist could be the difference between operating your rental property as a gain or a loss.
Here are nine tax deductions all residential rental property owners should be aware of.
Interest usually falls under the single most considerable deductible expense. This would include mortgage interest payments on loans taken to acquire or improve rental property and any credit card interest connected to your rental activity. There is currently a limit on interest deductions for landlords who earn more than $25 million from their rentals.
This is a special income tax deduction as opposed to a deduction related to rental properties. Depending on income, you may be able to deduct up to 20% of your net rental income, or 2.5% of the initial cost of your rental property, in addition to 25% of the amount you pay any employees. Note that this deduction is currently set to expire after 2025, so best take advantage of it now while you can.
The cost of your rental property—be it a house or apartment building—is not fully deductible for the year in which you pay for it. Landlords, instead, get back the property’s cost through depreciation, which involves deducting a portion of the property’s worth spread out over several years.
Have you done any repair work this year? This could include repainting, plastering, taking care of leaks, replacing broken windows, and fixing floors and gutters. The good news is that the costs of these repairs—so long as they’re claimed within the same year the repairs were made—are fully deductible.
Fees you’ve paid to accountants, property management companies, attorneys, real estate investment advisors, and other similar professionals can all be deducted. They fall under the category of operating expenses so long as the work paid for is related to your rental property.
Any time you hire someone to perform services for your rental property, you can deduct their wages as a legitimate rental business expense. It doesn’t matter if the individual is an employee, such as a property manager, or an independent contractor, such as a groundskeeper.
Any insurance premiums you pay are likely deductible. Among those, you can take advantage of include flood, fire, theft, and landlord liability insurance. If you have employees, you can also deduct the cost of their health and workers’ compensation insurance.
Tax deductions for home offices are reasonably well known, but it’s important to stress that you need to meet specific minimum requirements to qualify when claiming your home office. Consult with your tax preparer or accountant for details.
Also, you should be aware that this deduction can not only cover the space in which you do your office work but also any workshop space or other area devoted solely to your rental property business. Even if you rent your home yourself, the space dedicated to your rental business is still deductible.
Deductions for travel are an option many landlords overlook. In actuality, landlords are entitled to a tax deduction for nearly all driving connected with their rental activity. This even covers instances when a landlord drives to a rental property to deal with a tenant complaint or travels to a hardware store for a repair part. The only real notable exception is travel conducted in connection to performing improvements on your rental properties. Those expenses are, instead, part of the property’s tax basis and depreciated over the years.
As for vehicle expenses, landlords have two options. They can either deduct vehicle-related expenses such as gas, repairs, and maintenance, or they can use the IRS’s most current standard mileage rate. Just remember that if you pick the second option, you have to begin using it in the first year you use a vehicle for your rental business.
In addition, long-distance travel that results in expenses such as airfare, hotels, and meals can qualify for deductions. Just be aware that IRS auditors have a reputation for examining overnight travel deductions. Always make sure you keep proper records to back up your claims.
Taxes can be complicated, and adding rental or other properties to the mix only adds to that. You should consult with a qualified professional to help guide you and keep you up to date on the latest IRS rules, regulations, and available deductions. There’s a lot of money to be saved, but it’s up to you to find out how.