Although landlords are required by the IRS to report all rental income and to pay taxes on that income, there are many tax deductions landlords can take advantage of to lower their taxes. The key thing is to keep meticulous records and receipts of all your business-related expenses. For the landlords with records and strategies in place, the tax deductions can really add up. In this post, we'll take a closer look at possible tax deductions for landlords and how to utilize them to maximize your rental income.
What are rental property tax deductions?
Rental property tax deductions are expenses that rental property owners can deduct from their taxable income when filing their tax return. Tax benefits can be a big piece of the economic success of a rental property.
Tax Deductible Expenses for Your Rental Property Business
Landlords can deduct various expenses related to owning and operating rental properties. Some common examples of tax deductible expenses for landlords include:
While many landlords might know they can deduct maintenance costs, they might not know the extent of this deduction. You can deduct all maintenance expenses including
- The batteries for smoke detectors
- Light bulbs
- Landscaping and tree trimming
- Pest control
- Cleaning expenses
- HOA fees
According to NOLO, given that your repairs are “ordinary, necessary, and reasonable in amount,” your rental property repairs are tax deductible. This can include:
- Broken AC
- Plumbing Costs
- Replacing Broken Windows
- Fixing gutters or floors
If you do not live near your rental and travel to check on it, according to Landlordology, you can deduct travel expenses including:
- Hotel costs
- Up to 50 percent of your meals during your travel time
- Vehicle expenses such as mileage or gas, car rental or taxi costs
Home Office and Operating Expenses
For landlords who work from home, you can claim tax deductions for expenses of your home office from taxable income. You can further deduct the expenses of your home and office supplies including:
- Pens, pencils, and paper
- Computer Ink
- Staples and stapler
Other operating expenses are deductible as well, such as marketing and advertising costs and tenant screenings.
Even if your tenant reimburses you later (don't forget to claim that as income), you can deduct your utilities including:
All insurance premiums related to your rental business are generally tax deductible including:
- Landlord liability insurance
- Flood insurance
- Personal property protection
Mortgage Interest & Loans
According to NOLO, you can deduct interest on money you borrow for a landlord business including:
- Mortgage interest payments to lenders for loans to acquire rental property
- Mortgage interest payments for loans used to improve your rental real estate property
- Interest on personal loans used related to your rental business
Rental Property Depreciation
Depreciation deductions are allowable tax deductions for buildings due to structural decline. Essentially, it is an annual allowance for expected wear and tear that is depreciated over many years. Investopedia explains that in the U.S. residential rental property is depreciated at a rate of 3.636% each year for 27.5 years. Further, you can only claim depreciation on the rental building itself, not land.
Expenses paid to professional services related to your rental business are common landlord tax deductions. Examples include:
- Legal fees (could be a tenant complaint or entity formation)
- Real estate investment advisors
- Property management company expenses and property management fees
- Tax professional for your rental business
- Other employees and independent contractors
According to the IRS website, property taxes for rental properties are tax deductible.
Quick Tips for Capturing Tax Deductions for Landlords
Now that we've covered what a landlord tax deduction is and how to know which rental expense is a deductible expense, here's a few more tips to keep in mind.
Maintain Meticulous Rental Income and Rental Business Expense Records
Do not wait until tax time to try to figure out your actual expenses for the year. Use a tax or property management software from day one to make sure you have all necessary documentation.
Work with a Tax Professional
Rental property taxes are complicated and difficult. It's never a bad idea to consult a professional, especially since you can deduct fees.
Navigating the tax landscape as a landlord can be complex, but with a solid understanding of the tax obligations, benefits, and deductions available, you can effectively manage your tax liability while optimizing your rental property profitability. It is recommended to consult with a qualified tax professional who can provide personalized advice tailored to your specific circumstances. By staying informed and implementing sound tax strategies, you can ensure compliance, maximize deductions, and achieve financial success as a rental property owner.