There are a large number of property tax deductions that landlords can claim to mitigate their tax liability and improve portfolio cash flow.
There’s a good chance you’re giving more money to the IRS than you need to — many landlords are. This is because there are a large number of property tax deductions, and you may only be taking advantage of a fraction of them. It can be time-consuming to figure out which tax deductions apply to your situation as there can be wide differences depending on your location, property type, and long term financial goals. For example, there are significant variations in property taxes by state as well as state, county, and municipality-specific laws and regulations.
While doing the calculations to determine how much you actually owe can be a convoluted and time-consuming process, it’s definitely worthwhile in the end: tax deductions can often mean the difference between making a profit or a loss on a property.
Below we list 11 property tax deductions you need to be tracking using your income expense tracking system.
Typically, one of your largest property tax deductions will be interest payments. As well as interest payments on your mortgage, this can apply to unsecured loans that you’ve taken out to make improvements on the property and credit cards you used to pay for goods or services that relate to your rental business. In all these cases, the deduction is for the interest charges rather than the principal loan or purchase. Ordinarily speaking the principal is can be added to the cost basis of your property and depreciated over its useful life (27.5 years).
From 2018 interest deductions for landlords that make more than $25 million a year from renting their properties were limited to 30% of their adjusted taxable income. However, if you depreciate your property over 30 years instead of the standard 27 and a half, you’ll be able to receive the full deduction.
This is the second major property tax deduction for landlords. The great thing about depreciation is it has no impact on cash flow. You use this deduction to receive back the purchase price of your property over several years. It’s important to note that only the property itself can be depreciated, not the land, which means you’ll need to allocate the maximum amount possible to the building (within reason) to receive the highest deduction.
Any ordinary and necessary repairs, that restore the property to its original condition, cost a reasonable amount, and don’t add significant value to the property are generally classed as repairs and maintenance. You can also deduct labor costs if you use a contractor to carry out the repairs or the cost of the equipment if you do the repairs yourself.
Are home improvements tax deductible? This depends on the scale and significance of the work. Home improvements can be tax deductible if they are classified as repairs or maintenance.
However, if the work is more significant it may count as an improvement to the property. For example, converting an attic into an extra room, or putting in a new kitchen. These capital improvements which add value to the property cannot be immediately deducted. Instead, the expense needs to be added to the cost basis of your property and depreciated.
Any driving you do for your rental business is tax-deductible. This includes visiting the properties themselves as well as trips to the bank, the hardware store, and meetings with people like your accountant, attorney, and partners. The only exception is you cannot deduct reasonable commutes. Make sure you use an IRS-compliant log to keep track of mileage – you can easily do this in the inbuilt mileage tracker in the Landlord Studio app.
As well as electricity, water, gas, heating, and AC, internet and cable count as utilities. You’ll be able to receive a deduction whether you agreed to include utilities in the cost of rent for your tenant or your tenant will pay you back for utilities at a later date. In the case of the latter, the reimbursement from the tenant should be tracked as taxable income.
Is homeowners’ insurance tax deductible? Yes, along with other ordinary and necessary insurance, such as liability and special peril insurance. This is good news because premiums for rentals tend to be higher than average. If you run a rental company and employ people to work for you, it’s also possible to deduct health and workers’ compensation insurance. Finally, you can deduct losses for natural disasters and theft.
Another way workers provide you with a tax deduction is through wages. This doesn’t just apply to employees — paying independent contractors is also completely tax-deductible.
Professional fees are a broad category. Among others, it includes:
As a landlord, you can deduct all state and local taxes, except income tax, without limit. This includes property taxes, special easements, land taxes, school district taxes, wage and social security taxes, and inspection fees. You can also deduct occupancy tax if you own a short-term rental and your state or district imposes this type of tax.
If you run your rental business from your home, you can deduct expenses for a home office. As well as the actual space you use for the office, you’ll be able to deduct the cost of any equipment you purchase.
Once you’ve established your rental business, you can deduct education expenses for courses and training that contribute to your skills. These need to be skills that you’ll use for your existing business — not to start a new one — and you cannot deduct any training you took to start your business.
Claiming the maximum amount in tax deductions against your rental property income is not complicated at all when you use the right rental accounting tool. Landlord Studio gives you an easy-to-use platform where you can manage all aspects of accounting for your rental property, including income and expense tracking, receipt tracking, mileage tracking, and tax reporting.