Real Estate Taxes, Income, and Deductions - What Landlords Need to Know

If you want to run a profitable rental portfolio you need the tools and knowledge to streamline operating costs and maximize your tax deductions.

There is a lot more to owning rental property, whether it's an apartment complex or a single family home, than simply collecting rent and retroactively managing maintenance. You need to be aware of everything from how to find great tenants to creating an airtight lease. And when it comes to profitability it's essential to understand the taxes, income, and deductions that come with owning real estate investments.

If you don’t know the rules around the finances of being a landlord for residential real estate, then you could wind up losing a lot of money. So, here’s what a quick summary of what you need to know about the world of residential real estate taxes and accounting. 

What Are Real Estate Taxes?

There are a number of tax advantages to owning a rental property. However, to take advantage of these benefits you need to have a comprehensive understanding of the taxes and fees you need to pay on your real estate investments. Three of the main taxes and fees include:

  • Real estate taxes. These are yearly taxes that you need to pay on the assessed value of your property. Tax rates vary widely dependent on your location. IN this article we take a look at the states with the highest vs the lowest real estate taxes.
  • Rental income tax. Rental income is taxed at your standard income tax rate. You can learn more about rental income tax rates here.
  • HOA fees. Whilst not a tax exactly, many properties across the US have associated HOA fees and may also come with maintenance requirements to avoid fines. To avoid a surprise bill, research whether or not the property is in an HOA and what the fees are for this location.

What Is Rental Income?

Generally speaking, rental income is, at the end of the day, rent. It can also include subsidiary income generated form the property. For example, laundry or vending machines or you might charge extra for covered parking paces. And there are also expenses that tenants pay you for, like utilities. Essentially, any money you receive from your tenants in exchange for them being able to live on your property, you need to report as rental income on your end of year tax returns. 

However, if the tenant is paying you for an expenses such as utilities, then whilst you still have to report it as income, you can also deduct the expense against your income at the end of the year - thus reducing your end of year tax bill.

In order to maximize your end of year deductions and increase your portfolio profitability, make sure to keep accurate records of all your rental activities using a tool like Landlord Studio. This is also essential in case your real estate business is audited. Having accurate records with digitized receipts and other supporting documnets as proof will ensure your end of year tax claim is honored.

What Can Be Deducted From Rental Property Taxes?

Once you have rental properties under your belt, you will need to make sure that you know what expenses can be deducted from the cost of running your property. As long as the expenses are ordinary and normal for the renting business, and are needed to manage and maintain the property, then the expenses can be deducted. 

Here are some of the rental property tax deductions that you will be able to find with your rental property!

1. Real Estate Depreciation

Even the newest properties will eventually depreciate and the wear and tear of time will start to slow things down for your property. The depreciation of your property will happen, and the process is tax deductible, and you can claim it the second your property is available for rent. It's important to note that a portion of the deducted depreciation amount will be reclaimed by the IRS upon the sale of the property in a process called depreciation recapture.

You can also claim depreciation for any equipment that helps you run your real estate business, and for any additional improvements that you add to your property as well.

As long as what you have improved (such as adding a new roof or updating household appliances) your improvement just needs to last for more than a year, be necessary for your rental business, and it should lose value over time. After that, it is deductible!

2. Maintenance and Repairs

While improvements to the property are not immediately deductible and must be depreciated, costs associated with repairs that maintain the standard of the property and ensure it remains habitable, but don’t add extra value to the property, are deductible. 

These can include landscaping, heating, air conditioning repairs, painting, carpet replacements, and other repairs such as repairs for storm windows and security systems. There are also tax credits for heat pumps!

3. Utilities

Finally, while landlords can choose how they handle utilities, if you choose tocover them for your tenants they will be tax deductible. So if you want to cover gas, water, heating, and AC, then these expenses need to be accurately tracked in your accounting software and deducted from your end of year tax bill. 

4. Transportation and Travel Fees

If you are moving around a lot as a landlord between your various properties, then your transportation expenses can also be deducted as well. The easiest way to do this is to track your mileage using Landlord Studio's in-built automatic GPS mileage tracker and claim the standard mileage rate for the year.

5. Operating Expenses

Finally, you can also deduct other expenses that are necessary for the operation of the rental property, such as the salaries of employees, fees charged by independent contractors (groundkeepers, bookkeepers, accountants, attorneys) for services provided, accounting or property management software, and loan interest.

Read the complete breakdown of the Schedule E expense categories for real estate investors.

Do Your Research

There are a lot of things that come into play whenever you start delving into the world of residential real estate and the various costs, tax deductions, and income that it brings. In order to make sure that you aren’t about to run afoul of the IRS, you need the right tools and knowledge. So, whether you're a new landlord or an experienced one looking to expand their portfolio, make sure you’ve got a good grasp of the financial basics and take this opportunity to explore purpose built software like Landlord Studio.

Landlord Studio is an easy to use property management and accounting software designed specifically for real estate investors. Track income and expenses, digitize receipts, connect your bank accounts, collect rent, manage maintenance and more. All in one place and from any device.