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Rental Accounting

The Complete Guide To Rental Property Tax Deductions

Contents:

Updated August 2021

One of the major benefits of being a landlord is the rental property tax deductions that you can take advantage of. The tax benefits for landlords allow investors to deduct as much as $25,000 worth of expenses each year against their rental property taxes.

To take full advantage of these tax benefits though it is absolutely imperative that landlords keep careful records of all their income and expenses as well as carefully filing their supporting documentation throughout the year.

Using software like Landlord Studio can help keep you organized, allows you to store all your documentation in one handy location that’s backed up to the cloud, and even allows you to send invoices and receipts using our handy templates.

5 Reasons to Keep Careful Records using Landlord Studio:

  1. It will make it much easier and faster to file your taxes.
  2. Keeping careful records will help ensure you don’t miss anything important which could cost you money.
  3. It will help you file accurate claims – instead of relying on memory and guesstimates.
  4. If you are audited by the IRS you will have proof to back up your claim. Without which your claim will not be honored and you may even have to pay additional taxes and penalties.
  5. Landlord Studio is “mobile-first” meaning you can easily update your account on the go and even digitize receipts easily using your phone then and there.

Find out more about rental property accounting with Landlord Studio →

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How Much Can You Deduct as A Landlord?

According to the IRS, if you actively participated in the management of your rental property, you may be able to deduct up to $25,000 against your income each year.

However, let’s say your property brings in $20,000 but you spend $50,000 on it that year. You’d record a loss of $30,000 which is more than the allowed limit of $25,000.

In this scenario, you deduct the $25,000 from your current tax year and then carry over and “recapture” the remaining $5,000 in the following year. If you continue to have losses of more than $25,000 then you can continue to carry over the losses beyond that amount year after year.

For more detailed information read the IRS Publication 925: Passive Activity and At-Risk Rules

Are HOA Fees Tax Deductible?

A Homeowners Association (HOA) is a local governing body that sets specific rules and guidelines for the maintenance and presentation of a property in a condominium, gated community, apartment, or another type of planned development. By purchasing the property you agree to abide by these rules and guidelines and to pay regular HOA fees. These fees are often used to pay for maintenance, landscaping, and general upkeep of the community and common areas.

If your property is used for rental purposes the IRS considers HOA fees a regular business expense, and as such the HOA fees are tax-deductible.

Essentially, determining whether your HOA fees are tax-deductible depends on whether or not you live in that property.

  • If you live in your property year-round, then the HOA fees are not deductible as they are considered by the IRS as an assessment by a private entity as opposed to a business expense.
  • If the property is a rental property then the HOA fees are tax-deductible. In this scenario, the IRS sees these fees as property maintenance costs. You need to report HOA fees on your Schedule E (form 1040) when you submit your tax return.
  • If you live in your property part of the year then it becomes a little more complicated. But in a simplified sense, you can deduct HOA fees for the portion of the time that it is rented. For example, you rent it out for 9 months of the year – then you can deduct 75% of the HOA fees.

There are some exceptions to these rules, however. If the HOA fee is for an assessment for an improvement this HOA fee is not deductible and you’ll need to recoup your share of the costs of the improvement via depreciation.

10 Rental Property Tax Deductions Landlords Need To Know About

1. Interest

Interest is often a big deductible expense. For example:

  • Mortgage payment interest
  • Interest on loans for improving the property
  • Credit card interest for payments towards goods and services used in a rental activity.

These interest payments can quickly add up which makes the ability to offset these payments back against your taxes very valuable.

2. Depreciation

Depreciation is one of the major tax benefits of rental property. According to the IRS, the property has a useful life. As such, over the time you own the asset the cost of the property – though not the land can be depreciated and the depreciation makes up a large rental property tax deduction. the useful lifetime of a property according to the IRS is 27.5 years. This means you can claim the full value of the purchase price of the property back over this period.

You should also be aware that the IRS will claim a portion of the depreciated value back upon the sale of the property in a process called depreciation recapture.

Additionally, any capital improvements (this is work on the property that adds to or increases the property’s value and is generally a permanent fixture), or costs, such as replacing appliances, cannot be deducted as rental property expenses but must be added to the cost basis of the property and depreciated.

3. Repairs & Maintenance

Repairs and maintenance often come unexpectedly and can quickly add up affecting the cash flow and overall profitability of your rentals. Thankfully, the cost of maintenance and repairs qualify as rental property tax deductions and can be fully reclaimed at the end of the tax year.

It should be noted that repairs and maintenance costs do not include expenses or costs for improving the property.

Repairs are defined as any effort to maintain the current condition of the property and provided they are “reasonable, necessary, and ordinary” they can be fully deducted in the year which they occurred.

Examples of repairs include:

  • Painting
  • Plumbing Repairs
  • Air conditioning repairs
  • Fixing guttering
  • Replacing broken windows
  • Labor costs
  • Rental of necessary tools etc.

Maintenance costs are a little different. These are necessary expenses related to maintaining the property’s current condition – not fixing things that are broken.

A few examples of claimable maintenance expenses:

  • Pool maintenance and cleaning
  • Pest control
  • Gardening/landscaping or tree trimming
  • Machinery maintenance eg. chain saw sharpening
  • HVAC filters.

4. Personal Property used in the Rental

You can deduct the expense of any property owned by the landlord used in the property.

For example, any furnishings supplied by the landlord, appliances, or gardening equipment.

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.

5. Pass-Through Tax Deduction

Formally known as the Section 199a Qualified Business Income Deduction, and also called the QBI deduction, the pass-through tax deduction is designed to encourage Americans to start small businesses and engage in other entrepreneurial ventures.

In a nutshell, it treats income that comes from certain non-employer sources in a favorable manner.

This was part of the Tax Cuts and Jobs Act, which went into effect in the 2018 tax year. Like most of the provisions in this tax reform bill that affect individuals, it’s scheduled to end after the 2025 tax year.

Specifically, the pass-through tax deduction lets U.S. taxpayers deduct as much as 20% of their business income that comes from “pass-through” entities such as:

  • LLC’s;
  • Sole Proprietor;
  • S Corporations;
  • C Corporations.

This deduction is scheduled to expire after 2025.

6. Travel

Landlords are entitled to a rental property tax deduction for most of the driving undertaken in order to manage and maintain their rentals. For example, you can deduct travel expenses when you drive to your rental building for a routine inspection or to deal with a tenant complaint, or when going to the store to purchase parts for necessary repairs.

However, it’s important to note that you can’t deduct the cost of travel you do to improve your rental property. Instead, these expenses must be added to the property’s tax basis and depreciated over the 27.5 years you are allowed to depreciate the property.

If you drive between your rentals for business purposes you can:

  • Deduct your actual expenses (eg. gas and vehicle maintenance);
  • Use the standard mileage rate, $0.56 for 2021. (This changes yearly so check the IRS website for current rates).

Note: 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.

IRS auditors closely scrutinize travel expenses, especially for overnight travel. This is why you must keep concise and detailed records of all travel undergone and the purpose of that travel using a system like Landlord Studio.

To stay within the law (and avoid unwanted attention from the IRS), you need to properly document your long-distance travel expenses.

7. Employees and Independent Contractors

The wages of anyone hired to assist you in the managing and running of your rental property are counted as a business expense and are also an allowable rental property tax deduction.

This is for independent contractors, full-time employees, or just part-time.

8. Property Management Fees

Many costs associated with the management of your rental are normally deductible. For example, if you hire a property management company – or if you use a landlord software like Landlord Studio.

Both of these are tax-deductible expenses for active-passive landlords. Other expenses in line with this that are often allowable include listing fees or expenses.

9. Insurance

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.

Related: Should you Form an LLC for your Rentals

10. Legal and Professional Services

The final item on this list is fees you pay to accountants, attorneys, advisors, or other professionals that help you in the running and management of your real estate business.

You can deduct these fees as operating expenses as long as the fees are paid for work related to your rental activity.

What Is The IRS Schedule E Form?

In order to correctly claim your rental property tax deductions, you will likely need to report your income and expenses using the IRS form 1040 Schedule E. This is the form that you need to use to report income and loss for rental real estate, royalties, partnerships, and a couple more classifications.

Report your income and expenses using this form split up by property and itemized as shown in the below screenshot.

Landlord Studio has these categories already preloaded for you and easily allows you to generate property-specific Schedule E reports.

IRS form 1040 Schedule can be downloaded from the IRS website.

Using Landlord Studio to Track Rental Property Tax Deductions

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There are several ways that Landlord Studio property management software can save you time, hassle, and money when it comes to keeping your income and expense records.

1. We’re Mobile

Landlord Studio is available on all devices meaning you can easily update your income and expenses, wherever you are, whenever you need to. This effectively means you no longer have to sit down at your computer at the end of the day or week and spend hours entering expenses. Instead, enter them as you go.

On top of this, you can easily digitize receipts by taking a quick photo of them with your phone and storing them in your account. Plus our smart scan receipt feature will automatically read the receipts and fill in the details for you.

2. Easily Itemize Expenses With Our Expense Categories

We have created relevant categories based on claimable expense categories in the US for ease of use for our users. This makes tracking income and expenses quick and easy.

Simply select the relevant category from the drop-down and hit save.

3. Manage Expenses On An Organization, Property, Or Unit Level.

You must have the correct segmentation of your expenses. We allow you to organize expenses on an organization, property, and even a unit level.

4. Advanced Reporting

You can run instant customizable reports through our landlord software to gain a clear financial oversight as well as to help you easily and efficiently fill out your 1040 schedule e form.

5. Create a Schedule E Report

We recently released an updated report template for our US users to make filling out IRS for 1040 Schedule E. This report breaks down your income and expenses on a property-by-property basis to help speed up the filing of your taxes.

On top of this, you can easily print or email your reports straight from the app as well as give your acountant view only access!

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Conclusion: Rental Property Tax Deductions

Running a rental can be expensive. There are many miscellaneous costs and expenses which can quickly add up and become unmanageable. At times it can seem like making a property cash-flow positive might never happen.

This is why it’s so important to take advantage of the tax benefits of rental property. In order to do so, you need to make sure that you keep immaculate records of all your rental property tax deductions and income along with any of the required evidence.

This can be easily managed with a property management and rental accounting system like Landlord Studio – meaning you will never miss a deductible expense again and can maximize your tax deductions. 

Laws on what is an acceptable expense varies from state to state so if you are uncertain how to classify an expense or whether it needs to be deducted or treated as a capital expense and depreciated you should discuss this with your CPA and/or check local state laws to ensure you remain compliant.

Thanks for reading and we hope you found this blog interesting! However, do note that the purposes of this article are for general information. We are not licensed financial or legal professionals and as such nothing in this article should be understood to be financial or legal advice. If you require financial or legal assistance please seek the help of a competent professional.

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Ben Luxon

Ben is the editor and lead writer for Landlord Studio. He has worked with real estate professionals all over the world and written educational articles on tech, real estate, and financial growth for sites such as Forbes, TechBullion, and Business Magazine.

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