Every year, many landlords pay more taxes on their rental income than they have to. Why? They fail to take advantage of all the tax deductions available for owners of rental property. Rental real estate provides more tax benefits than almost any other investment. We recommend you consult with your tax advisor before investing or before deciding to make your current residence into a rental/investment property. You might want to run a sample rental home through your tax software (TurboTax) and become familiar with the Schedule E tax form available on the IRS website.
Owning an investment home is a great idea - but be smart about it! Here are the top 10 tax deductions:
Interest can be 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.
Typically you can depreciate your rental home (the home - not the land) over a 27.5 year period. For example, your home is worth $400,000.00 divided by 27.5 equals $14,545.00 in depreciation you may be able to deduct each year. Landlords get back the cost of real estate through depreciation. This involves deducting a portion of the cost of the property over several years.
The cost of repairs to rental property (provided the repairs are ordinary, necessary, and reasonable in amount) are fully deductible in the year in which they are incurred. Good examples of deductible repairs include repainting, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows.
4. 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.
5. Pass-Through Tax Deduction
Starting in 2018, most landlords will qualify for a new pass-through tax deduction established by the Tax Cuts and Jobs Act. This deduction is a special income tax deduction, not a rental deduction. Depending on their income, landlords may be able to deduct (1) up to 20% of their net rental income, or (2) 2.5% of the initial cost of their rental property plus 25% of the amount they pay their employees.
Landlords are entitled to a tax deduction for most of the driving they do for their rental activity. For example, when you drive to your rental building to deal with a tenant complaint or go to the hardware store to purchase a part for a repair, you can deduct your travel expenses. However, you can't deduct the cost of travel you do to improve your rental property--these expenses must be added to the property's tax basis and depreciated over many years.
If you drive a car, an SUV, a van, a pickup, or a panel truck for your rental activity (as most landlords do), you have two options for deducting your vehicle expenses. You can:
- deduct your actual expenses (gasoline, upkeep, repairs), or
- use the standard mileage rate (check the IRS website for current rates).
To qualify for the standard mileage rate, you must use it in the first year you use a car for your rental activity.
If you travel overnight for your rental activity, you can deduct your airfare, hotel bills, meals, and other expenses. If you plan your trip carefully, you can even mix landlord business with pleasure and still take a deduction.
7. Home Office
Provided they meet certain minimal requirements, landlords may deduct their home office expenses from their taxable income. This deduction applies not only to space devoted to office work, but also to a workshop or any other home workspace you use for your rental business. This is true whether you own your home or apartment or are a renter.
8. 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 (for example, a resident manager) or an independent contractor (for example, a repair person).
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.
10. Property Management & Legal Services
Finally, you can deduct fees that you pay to attorneys, accountants, property management companies, real estate investment advisors, and other professionals. You can deduct these fees as operating expenses as long as the fees are paid for work related to your rental activity.
Did You Know?
- Landlords can greatly increase the depreciation deductions they receive the first few years they own rental property by using cost segregation.
- Careful planning can permit you to deduct, in a single year, the cost of improvements to rental property that you would otherwise have to deduct over 27.5 years.
- You can rent out a vacation home tax-free, in some cases.
- Most small landlords can deduct up to $25,000 in rental property losses each year.
- A special tax rule permits some landlords to deduct 100% of their rental property losses every year, no matter how much.
- People who rent property to their family or friends can lose virtually all of their tax deductions.
If you didn't know one or more of these facts, you could be paying far more tax than you need to. For most of us, owning a rental home is a big decision. Seek professional legal advice and tax counseling to see how your specific income and tax situation applies.