It is crucial for the landlord to understand the costs you are allowed to deduct on your taxes. You need to take advantage of every possible tax deduction to reduce your tax burden and maximize your profit. Some of the expenses might seem intuitive, while others unstated and you need to understand the specific prerequisites for them. I am going to review the most popular landlord deductions and tax tricks.
Depreciation
You can claim a deduction for the depreciation of the asset. Not all of the assets are depreciable; they must meet the following criteria: last for at least a year, be business related and lose value over time. Depreciable assets include furniture, appliances, automobile, etc. Keep in mind that depreciation differs based on the type of asset. For instance, the microwave age faster than the building. There are different models to calculate depreciation: accelerated depreciation and straight-line depreciation.
Repairs
You can deduct the costs of property renovations that happened in the given tax year.
- Repairs are works that are necessary to maintain your property in the working conditions.
- Repairs may include the painting of the walls, refurbishing of the countertops, etc.
- Repairs are not supposed to add value to the property.
According to IRS, those repairs are considered improvements. They cannot be deducted in the given tax year, but they can be capitalized and depreciated over their life span.
Interest
Interest on business-related related expenses is also deductible. This involves the interest on car loan payments, mortgage, and credit cards. However, you should have records that you those assets were used for business and not personal use.
Home Office
If you use a certain part of your home solely for business purposes, you can utilize a home office deduction. The amount of deduction depends on what percentage of your home you use an office.
Travel Expenses
Landlords are allowed to permitted to deduct any local and long distance business-related travel expenses. This does not include the money you spent on your daily commute. Traveling from home to work are considered personal expenses under the IRS guidelines.
Travel deductions are calculated on the basis of the standard mileage rate or based on the total travel expenses. These expenses consist of gasoline and maintenance of the vehicle. You can also add toll and parking, license fees and even the interest on the car loan. If you don’t own the car, you can deduct the costs of public transportation. For the long-distance business journeys, you can subtract the cost of airline or train tickets.
Entertainment Expenses
No, it is not what it seems. Regrettably, you can’t claim a tax deduction on funds you used to treat yourself. Nevertheless, you can deduct expenses you used to entertain your prospective tenants or buyers. For instance, fees for on-site entertainment during an open house, let’s say barbeque, are deductible. Similarly, taking a client on tour around the neighborhood or to the local country club are also entertainment costs.
Legal and Professional Fees
If you hire a real estate professional to assist you with your business matters, their fees are also deductible. Add to your deduction list:
- Legal fees
- Broker fees
- Accountant fees
- Consultancy and audit fees.
You need to remember that you cannot deduct legal fees for recovering the property, defending the title or improving the property in any way. Those types of expenses should be added to the basis of the property. However, fees of the property inspector, appraiser and so on can and should be deducted.
Employee Compensation
If you employ someone to work for you permanently, you can deduct the salary you pay to them. That include not only full-time employees, such as superintendents and property managers but also part-time workers, such as contractors and handymen.
Taxes
You can deduct the fees for the preparation of tax forms and fees for tax advice related to your rental property. Additionally, you can write off:
- Sales tax
- Property tax
- Real Estate tax
Those taxes have to be on the business-related items that are not depreciable.
Insurance
This is one of the sweetest deduction you may encounter. Surprisingly you can deduct premiums you pay on various landlord insurances: accident, theft, vehicle, flood, fire, as well as health insurance for you and your employees. In case your property was damaged by the natural disaster, such as fire, flood, landslide or volcano eruption you might be able to deduct some of the expenses. The amount you can deduct depends on the scale of damage and your insurance coverage.
To Sum Up
Keep Records
I’d like to give you an important piece of advice. Keep exhaustive records of your expenses. I cannot stress this enough; you need to collect and preserve all the checks, receipt and digital records and keep them handy. You need to provide proof to IRS of all your deductions in case you are audited. The records have to be accurate and detailed.
Every Deduction Is Case-Sensitive
The deduction described above are the most common tax deductions. It does mean that it has to apply to your particular rental business.
For instance, most of these deductions are irrelevant for those who rent out apartments or houses which are also their residence. The property would qualify as a residence if you used it for personal use for greater than the number of days defined in Schedule E of the current tax year.
Additionally, if you decide to claim the deduction on the business expense, first determine if this expense was ordinary or necessary.
- Ordinary Expenses are common and accepted in the industry, such as contractor costs for fixing the plumbing
- Necessary Expenses are necessary and appropriate for your business. For example, purchasing a CRM or accounting software may qualify as a necessary expense.
Even though I tried to provide the most exhaustive list possible, there is also plenty of miscellaneous deduction, such as expenses for marketing, internet, etc. Keep in mind, that every business situation is unique and case-sensitive, there are additional rules and exceptions in each state. Thus, always consult with a certified public accountant or IRS to know the right way to file taxes and claim a deduction in your specific case.
My sister would like to hire a tax resolution service that will be able to help her out since she’s having a hard time fixing the taxes and payrolls. Well, you made pretty a pretty good point that she must fix the travel deductions too. Thank you for sharing here as well the importance of adding legal fees and accountant fees to the deduction list.