Common Tax Deductions for Landlords
What You Can and Can't Deduct
The federal government allows landlords and rental property owners to deduct certain expenses on their taxes, which can offset their taxable income. Being able to take advantage of so many tax deductions is often what makes owning rental property a lucrative venture. The following are the most common tax deductions for landlords.*
You may only deduct these expenses if they are considered ordinary and necessary in the line of business:
- An expense is considered ordinary if it is “common and accepted” within your industry. For example, an ordinary expense for a landlord could be paying a contractor to fix a roof leak.
- An expense is considered necessary if it is “helpful and appropriate” to your business. For example, a necessary expense for a landlord could be buying Quicken Rental Property Manager, to more seamlessly keep track of all the numerous records a landlord must document.
Two Points of Caution
- You must keep detailed and accurate records if you are going to claim any of the following as deductions on your taxes.
- These are common tax deductions. They do not apply to every landlord, rental property owner, or property investor.*
- For example, many of these deductions do not apply to those who rent out homes or condos which are also considered their residence. The property is considered a residence if you used it for personal use for greater than ‘X’ number of days in that year or ‘X’% of days that the property was rented out at fair market value. (These numbers will be listed in the current tax year's Schedule E or you may consult with your accountant).
- *You must consult your accountant or the IRS to determine the correct way to file your taxes and the proper deductions for your specific situation.
Common Tax Deductions
The depreciation expense is used for those things you have purchased for your business which have a useful life beyond the current tax year. For something to be considered depreciable, it has to meet three rules:
- Be expected to last for more than a year.
- Be valuable to your business in some way.
- Lose its value or wear out over time.
Some examples of depreciable assets are:
- The purchase price of the property (minus the value of the land).
- Improvements to the property such as new kitchen cabinets or a brand new roof.
- Shrubbery or fences.
- Furniture or appliances.
- Automobile for business use.
Different assets, such as a refrigerator and a building, will have different useful lives and there are different types of depreciation that can be used, such as straight line depreciation and accelerated depreciation. Consult the IRS or your accountant to determine the type of depreciation to use and the useful life of each asset you are trying to depreciate.
2. Passive Activity Losses
Owning rental property is considered a passive activity. There are complex rules which apply to passive activities, but in short, they limit your ability to claim losses incurred in passive activity against other types of income.
There are certain exceptions:
- If you are considered a real estate professional (certain rules apply such as working at least 750 hours a year on real estate related activities), any rental real estate activities you participate in are not considered passive activities.
- If you are considered actively involved in your rental activity, you can deduct up to $25,000 in passive rental losses if you make under $100,000. Actively involved means you must have participated in making management decisions, such as finding tenants or deciding on the terms of your rentals, and your interest in the rental activity has never been less than 10% for the year. The amount you can deduct will decrease for every dollar your income is above $100,000. You will not be able to deduct any passive activity loss once your income reaches $150,000.
You may deduct the expense of repairs incurred in a given tax year. Repairs are considered work that is necessary to keep your property “in good working condition”. They do not add significant value to a property. Repairs include things such as painting. It is important to understand that all maintenance you do on your property is not considered repairs. The IRS makes a distinction between improvement and repairs. Improvements are seen as adding value to the property. Improvements cannot be deducted in full in the year they incurred.
Rather they must be capitalized and depreciated over their useful life.
See Also: Improvements vs. Repairs
4. Travel Expenses
Landlords are allowed to deduct certain local and long distance travel expenses that are business related. This does not include commuting expenses, meaning traveling from your home to your everyday office or place of business.
If you have your own automobile for local travel, you can take your deduction using either the standard mileage rate or using the actual expenses incurred, such as the cost of gasoline and maintenance on the vehicle. You can also deduct parking fees and tolls, interest on a car loan and any applicable registration or license fees and taxes.
If you do not have your own vehicle, you can deduct your public transportation expenses for business purposes.
You can deduct the interest you have paid on business related expenses. For example: You can deduct the interest you have paid on mortgage payments or other business loans, car loan payments (but only the part used for business purposes), and the interest paid on credit cards used solely for business purposes.
6. Home Office
You can take the home office deduction if you use a part of your home exclusively as an office for your business. You must conduct the majority of your business here to claim the deduction. The amount you can deduct depends on the percentage of your home that your home office takes up.
7. Entertainment Costs
Unfortunately, entertainment costs do not refer to costs used to entertain yourself. Entertainment costs mean those incurred during business dealings. For example, taking a client to your country club or giving a potential investor two tickets to the theater are entertainment expenses.
8. Legal and Professional Fees
If you hire a professional to do work for you, the fee you pay to them is deductible. This includes attorney fees, accountant fees, real estate agent fees, or fees paid to other professional advisors.
9. Employee Compensation
If you hire someone to do work for you, you can deduct the wages you pay to them as business expenses. This includes the wages of both full time employees, such as a property manager or a live-in superintendent and part time employees, such as a contractor you hire once to fix a roof leak.
You can deduct your property taxes, real estate taxes, and sales tax on business related items that are not considered depreciable for the year. You can deduct fees for tax advice and the preparation of tax forms related to your rental real estate property. You cannot, however, deduct legal fees from defending title of the property, to recover property or to develop or improve property. You must add these types of fees to your property’s basis.
You can deduct the premiums you paid on most types of insurance including health, accident, causality, theft, flood, fire, liability, vehicle, and health insurance for your employees.
If your property was damaged by a catastrophic event like a fire, you may be able to deduct some or all of the loss. The amount you can deduct will depend on your insurance and the amount of damage to the property.
Other Common Tax Deductions Include:
- Advertising costs.
- Rent you paid to others.
- Telephone calls related to your rental property activities. However, you cannot deduct the first line for local service coming into your home. That is considered a personal line.
- You can credit or deduct expenses paid to make your property accessible to individuals with disabilities or the elderly.
- If your property is considered a commercial building, you can deduct costs to make it energy efficient.
*You should always consult the IRS or a certified accountant to decide what deductions are applicable to your specific situation.