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tax expenses

There are numerous tax benefits that come with being a landlord. However, many landlords don’t take full advantage of these benefits and end up overpaying their taxes each year, sometimes by thousands of dollars.

The first thing a landlord needs to do to make sure this doesn’t happen to them is to employ a good income and expense tracking tool such as Landlord Studio, which allows them to carefully keep track of every single expense with minimal effort. The second thing they need to do is make sure they understand what they can and can’t deduct.

Secondly, landlords need to know exactly what they can and can’t deduct. If you are uncertain it’s well worth consulting with a skilled CPA to make sure you’re taking advantage of every potential deduction.

In this article, we take a look at some of the major taxable deductions landlords need to track to mitigate their end of year tax liability.

What Qualifies As An Expense?

There are two types of expenses: current expenses and capital expenses.

Current expenses

These are generally one-off items that help keep the property in good working condition and habitable such as maintenance work, or items that help you operate your rental business.

You can deduct the entire expense from your taxes in the same year it was incurred. Here’s what necessary to qualify as a current expense:

  • It must be ordinary and necessary. Ordinary expenses are those that are common and generally accepted in the business. Necessary expenses are those that are deemed appropriate, such as interest, taxes, advertising, maintenance, utilities, and insurance.
  • It must be current. Current expenses must have more short-term value than long-term value. Fixing a hot water heater has short-term value. Replacing the appliance has long-term value.
  • It must be directly related to your rental activity. The expense must be business-related.
  • It must be reasonable in amount. If for example, you claimed to have paid $500 for a toilet seat, you may get audited.

Capital expenses

Anything that increases the value of the property or extends its life is categorized as a “capital expense” or “improvement” and must be capitalized and depreciated over multiple years.

Stay Organized With the Best Income Expense Tracking Tools

Before being able to claim any of the expenses outlined in this article you need to be sure you have detailed and accurate records to back up each of your claims. This is why it’s suggested that you track your expenses as you make them and digitize receipts in real-time with software like Landlord Studio. This will make your end of year tax prep much more manageable.

With Landlord Studio, you can track your expenses and categorize them as the IRS does. You can take pictures of your receipts and upload them so they’re attached to each expense. And then at the end of the year you can generate and run our Schedule E report which details an expense summary broken down by property that matches the required fields on your IRS 1040 Schedule E.

If you fail to have detailed accounts and proper receipts and can’t validate the business necessity of each expense, you will have to pay the amount due, with interest, if you get audited.

11 Major Tax Deductions for Landlords:

  1. Interest
  2. Depreciation
  3. Repairs
  4. Personal Property
  5. Pass-through Tax Deduction
  6. Travel
  7. Employee and Independent Contractors
  8. Insurance
  9. Legal and Professional Services
  10. Utilities
  11. Taxes

1. Interest

Interest is a major deductible for many landlords. The key reason it’s such an important deduction is that, while you can’t deduct your mortgage payments themselves, you can deduct the interest payments for mortgage loans used to acquire or improve a rental. Another common example of an interest payment is the interest paid on credit cards used for goods or services related to rental property activity

2. Depreciation

Another major deductible for landlords in the US is property depreciation. Property depreciation allows you to deduct the value of the house against your taxable income.

There are a couple of conditions for this, however. The first is that you must spread the deductible cost over 27.5 years.

The second consideration is that the value of the land can’t be depreciated only the property itself. For example, you purchase a property for $275,000. The land the property is built on is worth $50,000. Meaning the adjusted cost basis that you can depreciate over the allowed time is $225,000. This allows you to deduct $8,181 per year against your taxable income.

Additionally, you can depreciate improvements to the house using an adjusted cost basis of the house value.

Download Tracking Expenses Guide

3. Repairs

Work done on the property which is deemed as an improvement is not deductible for landlords. However, the cost of maintenance and repairs to the property are fully deductible in the year in which they occur.

You have to be careful not to deduct what the IRS determines as improvements as maintenance. As a quick guideline, you can work on the principle that a replacement is almost always an improvement —not a repair, at least for tax deduction purposes.

To obtain the best tax deduction results then you should patch, mend, or fix things instead of replacing them. This can often be a little counter-productive as a replacement might work out cheaper, however, you might not be able to deduct it so it will cost you more.

For example, if a tenant damages a portion of a carpet, instead of replacing the entire carpet get it professionally cleaned or repaired.

A few examples of deductible maintenance and repair costs include:

  • Repainting
  • Fixing guttering
  • Fixing floors
  • Plastering
  • Replacing a broken window.

4. Personal Property

Personal property, such as furniture or whiteware that is used in rental activity can be deducted in a single year. This deduction comes under the de minimis safe harbor deduction and is allowable for property costing up to $2,000.

Examples of personal property include:

  • Furniture used in a furnished apartment.
  • Appliances (eg. fridge, oven, washing machine).
  • Any supplied gardening equipment.

5. Pass-Through Tax Deduction

Pass-through tax deduction is a special income tax deduction rather than a rental property-specific deduction and was established as part of the 2018 Tax Cuts and Jobs Act.

Depending on your income landlord’s may be able to deduct either (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.

6. Travel

Landlords are entitled to a tax deduction for travel related to their rental activity. In the main, this means deducting mileage for any driving done to manage your rental property. For example, driving to the property for a routine property inspection.

It’s worth pointing out though that you cannot deduct any travel expenses to a property that is done to improve the property. These costs, just like improvement costs need to be added to a property’s tax basis and depreciated over many years.

To deduct your driving expense you can do one of two things. Either:

You must use the standard mileage rate in the first year you use a car for your rental activity to be qualified to use this rate going forward.

To take advantage of this deduction, you need to carefully and precisely track and monitor your traveling as the IRS closely scrutinizes travel deductions especially any deductions made for overnight travel. To stay within the law (and avoid unwanted attention from the IRS), you need to properly document your long-distance travel expenses.

You can easily do this using Landlord Studio’s built-in mileage tracker.

7. Employees and Independent Contractors

You can deduct the wages of anyone employed to perform services for your rental activity. Independent contractors include examples such as electricians or plumbers; whilst an employee is someone like a resident manager.

8. Insurance

All the Insurance premiums you pay for your rental property, including, fire, theft, and flood insurance as well as any landlord liability insurance can be deducted. On top of this, if you have employees involved in the management of your property you can deduct the cost of their health and workers’ compensation insurance.

  • Homeowners insurance
  • Mortgage insurance premiums
  • Fire/damage/liability insurance
  • Flood insurance riders
  • Theft insurance
  • Workers’ compensation insurance
  • General liability insurance
  • Personal umbrella insurance

9. Legal and Professional Services

The final item on our list is the cost of legal and professional services. This can include fees paid to attorneys or accountants, as well as costs associated with the creation of legal documents and property management. Landlord Studio property management software falls under this category.

10. Utilities

Every landlord handles utilities differently. If you choose to cover things like gas, electricity, water, heating and AC for your tenant, they’ll be tax deductible.

  • Electricity
  • Gas
  • Heating oil
  • Water and sewer
  • Trash and recycling

11. Taxes

You can deduct your real estate taxes. But limits apply and you have to itemize to take the deduction. The Tax Cuts and Jobs Act limits the amount of property taxes you can deduct. For 2019, the IRS says you can deduct up to $10,000 ($5,000 if you’re married filing separately) of the following costs:

  • Property taxes, including real estate taxes and personal property taxes.
  • State and local income taxes or state and local sales taxes (you can’t claim both).

These are collectively known as the state and local taxes (SALT) deduction. In some cases, it’s hard to predict if you’ll benefit more from the income tax or sales tax deduction, so run the numbers if you’re not sure.

Final Thoughts

To make the most out of your deductions and take full advantage of the annual deductible allowance of $25,000 you need to carefully track your income and expenses. The most efficient way to manage this is to use a designated software such as Landlord Studio.

Landlord Studio allows you to track your income and expenses at an organization, property, and unit level. On top of this, connect your bank accounts and use our smart scan feature to quickly enter receipt details using your camera.

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Please note that all of the above is for the purposes of general information and does not constitute advice. If you need help or legal advice please contact a licensed professional.

LandlordLandlord AccountingLandlord AppLandlord SoftwareRental Property AccountingTax Deductible Expenses

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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