Top 11 Landlord Tax Deductions
Like most businesses, owning rental properties means that you need to find a way to maximize profits while juggling tenant satisfaction and maintaining a fair market value. This can be a difficult balancing act given the unpredictability of the recent economy. However, landlords are entitled to several tax benefits to help you deal with this balancing act. You just need to know what you can claim.
- There are several tax benefits for landlords available.
- Mortgage interest payments, wages, and equipment purchases are all possible tax write-offs for landlords.
- Some expenses can be claimed within the year they were incurred, while others must be claimed over time through depreciation deductions.
- Property loss may be written off if your insurance does not cover it.
11 Tax Deductions for Landlords
1. Mortgage Interest
Unless you purchased your rental property outright, you probably have mortgage payments, which include principal and interest. You can deduct the amount paid for the mortgage only. Even if you own a duplex, rent out one half, and live in the other, you can deduct half of the mortgage interest payment on your tax return.
2. Property Taxes
Many landlords must pay property taxes as state or local taxes. This involves any assets, such as land, that you need to buy to enhance your property business. The amount will vary based on each asset’s value. The value of your assets is based on your county assessor assessment. The whole amount of the tax is deductible from the tax return if the whole property is a rental property.
3. Employees and Independent Contractors
Wages for full-time employees and payments to independent contractors can be claimed as a rental business expense. If you provide any other benefits to your employees, like health insurance or retirement matching, those are also fully deductible. You may also claim 100% of your payments for employee workplace events like holiday parties as deductible expenses. In addition, you may claim 50% of your expenses related to networking with a potential client or associate, such as the price of your bill if you take them out to dinner for business purposes.
4. Capital Expenses and Improvements
For tax purposes, a capital expense is any purchase that is intended to last longer than 1 year and generate future revenue, such as new energy-efficient windows. Those purchases are considered investments and will become assets in your business. Although You cannot fully deduct these expenses in one tax year, those assets can be depreciated, lowering your tax bill in future years.
Improvements refer to any work done on the property to increase its value. Improvements will increase the basis in the rented property value, decreasing taxes due when the property is sold.
5. Insurance Premiums
The premiums you pay for almost any insurance related to your property are deductible. This includes theft, fire, flood insurance, and landlord liability insurance. You may also deduct the cost of health insurance premiums as part of your employees’ benefits.
Take advantage of every deductible expense on your next tax return. Watch this video to see how FreshBooks takes the pain out of tax preparation.
6. Home Office Expenses
You may deduct expenses related to your home if you use part of your home for your rental business. This is true even if you only use a designated section of a room. You can calculate how much you can claim based on the square footage of your workspace.
Simply divide your workspace’s square footage by your home’s square footage and multiply that by a prescribed rate. If you choose the simplified method, the IRS sets a maximum on how many square feet you can claim for this.
Currently, that maximum is 300 square feet at a $5 rate. You can also use the standard method to allocate and calculate the home office expenses, which requires more record-keeping but might result in a higher tax deduction.
7. Travel Expenses
You may deduct travel expenses related to your rental property business. This includes the price of gas, oil, parking fees, tolls, and auto repairs. This is true even if you are using your personal vehicle. However, the travel expenses must be explicitly related to your rental business.
For example, going to check on your rental properties or driving to networking events are all eligible business purposes. Also, note that scoping out a new property you will never purchase is not considered an eligible travel expense.
8. Repairs and Maintenance
Unlike improvements, repair costs refer to the work needed to return an asset to its original state. This is true for regular maintenance tasks like mowing the lawn or fixing a broken faucet or toilet. Repairs and maintenance are considered operating expenses; you can claim them in full in the year you pay them.
9. Ordinary and Necessary Expenses
Ordinary and necessary expenses include everyday expenses related to your business. Examples of such expenses are advertising your rental properties, utilities that you cover as part of your rental agreement or the fee for the cleaner you hire to clean the property between renters.
Ordinary expenses may also be the cost of your cell phone and internet. The IRS defines ordinary expenses as any expense that is generally accepted as a cost of doing business. Bear in mind that some expenses might be ordinary and necessary for one business but not for another one.
10. Casualty and Theft Losses
Any property damage or asset loss related to theft, vandalism, or acts of nature, such as fires or floods, may be claimed as deductions. Although you may only claim rental property losses if they are not fully covered by insurance, you may still partially claim some losses if your insurance only partially covers them.
11. Professional Services
Professional fees incurred for accounting, legal, or seeking tax advice are deductible if the advice given is solely for your rental property business. You might want to hire a consultant to help you with the cost segregation study so your depreciation amounts are more beneficial for you. You may also need to hire a lawyer to help you with an eviction. All those expenses are deductible on your tax return.
FreshBooks Makes Tax Preparation Easier
Be sure to claim every tax-deductible expense for your rental business this tax season. Capture your actual expenses using FreshBooks, so you’ll know exactly how much you can claim (and how) when tax time comes. Our accounting software is user-friendly and built with business owners in mind. This makes it the perfect tool for calculating your rental property tax deductions.
Try FreshBooks free today to see how you like it. Remember, if you decide to keep subscribing, you can claim your subscription fees as long as you use it for your rental property business.
Whether or not you’re a rental property owner, FreshBooks is still the perfect fit for your small business. Learn more about small business tax deductions to see what you can claim and how we can help.
FAQs about Landlord Tax Deductions
Have more questions about tax credits for landlords? See if our FAQ section can answer them.
Can you write off appliances for a rental property?
Appliances are tax deductible if you purchased them for a rental property you own. Depending on the value of the appliances and if you purchase them with the building or later, you may either expense them in the year of purchase or via depreciation expense over the life of the appliances.
What is not deductible as a rental expense?
You can only deduct expenses on vacant rental properties if they are listed for rent. You also cannot deduct the loss of rental income while the property is vacant.
What percentage of rental income goes to expenses?
Every landlord has different calculations based on their situation. A landlord who has a low mortgage amount might want to go for much lower expense amounts than someone with a high mortgage. However, most landlords adhere to the 50% rule, which states that 50% of your rental income will go to operating expenses.
You can use FreshBooks to plan out your expenses. Our accounting software lets you calculate your total income so you can figure out the exact dollar value you should put towards your operating expenses.
How much does the IRS take from rental income?
The IRS taxes rental income at your standard income tax rate unless you file as a C corporation. However, if you claim depreciation, the deduction might wipe out your rental income, and you might not have to pay any taxes on it in the current year.
FreshBooks can help you for tax preparation to pay tax on any income you make. Easily calculate your standard income tax rate and see how it applies to what you make off rent.
Is rental income passive income?
The IRS treats rental income as passive income in most cases. However, there are a few exceptions. Exceptions include:
- If the rental property is owned by an individual who qualifies as a real estate professional
- If you operate the property as a C Corporation
- If your rental property is considered a short-term rental, where the tenant stays for 7 days or less
- If you rent out your property and provide substantial services like daily breakfast or airport pickup to your renters
About the author
Sandra Habiger is a Certified Public Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Learn more about her work at http://www.sixfiguresaccounting.com/ .