Category: Investment Property
Rental property tax deductions reduce the amount of income tax you pay on your rental income.
They’re a good thing.
And because they can save you money, you shouldn’t ignore them. In fact, documenting your rental expenses and deductions should be a regular and habitual part of your rental business. If you don’t keep current records of your expenses, starting tracking them today so you’re not scrambling at tax time to recreate 365 days worth of deductions.
Here are some of the most important deductions you could benefit from:
1. Interest on Your Rental-Related Loans.
It’s important to make the distinction between principal and interest. You cannot deduct the amount of the loan (the principal); you can, however, deduct the interest on the loan that you pay in any given year.
Typically, as a rental owner, you’ll have some of these deductible interest expenses:
- Interest on loans to buy your rental property (look for the Form 1098 from your lender each year).
- Interest on loans to refinance your rental property (ditto: Form 1098).
- Credit card interest for goods and services bought for the rental property.
- And don’t forget about personal loans for things related to the rental property.
2. Travel Expenses.
If you have any travel expenses related to your rental property, such as transportation, lodging, and meals, they’re fully deductible. Also, if you use your personal vehicle in your rental property business, you can use one of two methods to deduct your related expenses: use the standard mileage rate or actual expenses. The IRS provides more information in Publication 463.
3. Repairs & Maintenance.
A repair is any work that puts the property back in its original condition. Reasonable and necessary repair costs for your rental property are tax deductible. Maintenance doesn’t always involve fixing something that’s broken, but it gets to the idea of keeping the property in its original condition, and in the long run a regular maintenance program could save you on emergency repair costs. Maintenance expenses that are deductible include:
- Light bulbs, smoke detector batteries, HVAC filters, etc.
- Pest control
- Cleaning supplies
Depreciation is a process through which you deduct long-term assets (assets you hold for more than one year) over many years. Long-term assets include rental buildings. Land is not included. Tangible personal property that lasts for more than one year, such as carpeting and kitchen appliances, can also be depreciated. Because depreciation can be very complicated, it’s best to discuss it with your accountant. And if you want more information, Nolo.com does a pretty good job describing depreciation for landlords in more detail.
Insurance premiums, including those for landlord liability, theft, fire, and flood, are tax deductible.
Real estate taxes, property taxes, and state, county and local sales taxes are deductible.
7. Home Office & Office Supplies.
Many landlords don’t take advantage of the home office deduction, because quite frankly, it’s a bit of a pain AND the IRS tends to closely scrutinize this one. However, if you use an area of your home exclusively for your rental business, it might be exploring with your accountant. In addition to deducting for your home office, you can also deduct for office supplies used in carrying out your rental business. Deductible office supplies include writing implements, paper, notepads, printer ink, envelopes, and stamps.
If you pay any utilities for your rental property, you can deduct them. These include:
- Water & Sewer
9. Professional Services.
If you need to hire a lawyer, accountant, or other professional, that cost is deductible and considered part of your operating expenses. Often, DIY landlords hire lawyers to handle tenant evictions (link to evictions article), or they’ll decide not to landlord themselves anymore and hire a property management company instead, for a number of reasons.
Any money you spend on advertising your property for rent is deductible, whether it’s online, print, or radio.
Here’s some related information you might find useful:
- There is a limit to how much you can deduct: most landlords can deduct up to $25,000 against their rental property income.
- Security deposits from your tenants are not taxable (as rental income) when you receive them if you intend to return them to your tenants at the end of the lease.
- If you require first and last month’s rent when a tenant moves in, the total amount you receive (two months rent) is taxable the year you receive it, even thought that last month’s rent may not be used by the tenant until later years.
- Generally deductions must be made in the same year that the expense was paid. In much the same way, income must be logged in the year the payment was received.
- If you use any part of your rental property for personal use, check out this publication from the IRS, and consult your accountant or tax adviser.
- Keep receipts and records of payments, in case the IRS has some questions. Some landlords keep an envelope for each year’s receipts; others file receipts based on type of expense. Choose a system that will work for you. This article has some useful tips, if you’re looking for ideas.
As always, the information provided here is just that–it is for informational purposes only and under no circumstances whatsoever should it be considered legal advice. If you have any particular questions or issues, please consult an attorney.
By Tracey March
How do I identify and prevent my rental property from becoming a Breaking Bad nightmare?
Breaking Bad, the hit television series based Albuquerque, New Mexico, is in its final season.?While many of us are sad to see this show end, I for one am grateful that my everyday life is not a Breaking Bad world of meth labs and drug dealers.
However, I am trying to not be naive. Meth labs are often set up in rental homes, so landlords and property managers are at risk of having their rental properties turned into methamphetamine production facilities. This is a big deal because the chemicals that are used to make meth are highly flammable and explosive. And meth residue is extremely toxic and considered hazardous waste. Once it is discovered, the property owner is responsible for cleanup, which can cost tens of thousands of dollars, and most insurance policies will not cover it. In addition, meth residue can permeate an entire building, which means remediating all affected units, losing rental income, and relocating residents.
Given the physical dangers and financial consequences of renters setting up meth labs in your rental home, I thought some meth guidance might be in order:
What are signs my rental property is becoming a meth lab?
Certain ingredients are necessary to make meth. If you watch Breaking Bad, you might recognize some of them. When you see the list, you understand why it is ?so toxic and why it is good to spot these toxic residues:
- Large amounts of cold, diet, or allergy pill boxes (over-the-counter ephedrine or pseudoephedrine)
- Sheets or filters that are stained red or have a white, powdery residue.
- Empty containers of anti-freeze, white gas, ether, or starting fluids.
- Drain openers, freon, lye, paint thinner, acetone, or alcohol.
- Ammonia or propane tanks, anhydrous ammonia (in coolers).
- Camp stove fuel containers or other compressed gas cylinder.
- Jars or bottles with rubber tubing attached.
To make one pound of methamphetamine, six pounds of hazardous, toxic waste is produced. Besides ending up in the walls, floors, HVAC system, carpet and other places, some of the waste is often dumped on the ground, so also look outside for dead grass or plants, and stained soil.
How can I prevent my rental from becoming a meth lab?
Screening your tenants is and critical. People who cook meth tend to end up in rentals that are self-managed and do not have a standardized tenant screening procedure. So make sure to:
- Have a solid tenant screening system in place, or hire a property management company?that does.
- Call previous landlords to confirm that your applicant was a good tenant in the past (make sure the phone number you have is to the actual landlord, and not someone pretending).
- Check employment references, and verify income. Follow up if your tenant pays for rent in cash.
- Include in your lease agreement that there will be regular inspections (with the proper 24- or 48-hour notice, as required by state law. Regular inspections may deter someone who is engaged in illegal activities.
- Let the neighbors know you are the property owner, and that if they notice anything suspicious you’d appreciate a phone call to either yourself or your property manager.
Should I let new tenants know that the unit was previously contaminated?
The answer depends on which state you live in. Scripps Howard news service examined state meth disclosure laws in 2012 and found that seventeen states require property owners to tell renters about prior meth contamination, although several of those states waive that requirement if the meth residue has been officially cleaned up.
One more warning for rental property owners: if you are planning on expanding your rental property inventory, make sure you are confident that any properties you purchase were not used as meth labs in the past, because as soon as you own it, you become liable for the cleanup. During due diligence, if you have any suspicions, consider checking with the local police department, and have the property tested during the inspection. If you find suspicious residue, you can even test it yourself with a ten-pack meth residue test kit from Amazon.com for about $30. If you get a positive result, that $30 would be money well spent.
Have you had any Breaking Bad experiences with your rental property?
Are you looking for a local property manager expert?
As always, the information provided here is just that–it is for informational purposes only and is not legal advice. If you have any particular questions or issues, please consult an attorney.
By Tracey March
 For those who don’t follow it, Breaking Bad is about a high school science teacher (played by Brian Cranston) turned methamphetamine cooker and dealer to provide additional income for his growing family when his cancer treatments start eating up his savings.
Super Bowl XLVIII is this weekend. Woot!
For those of us who aren’t Roman-numerally fluent, that’s Super Bowl 48. And in just a few days, the Seattle Seahawks and the Denver Broncos will be duking it out for a Super Bowl ring at Metlife Stadium in New Jersey. Doing what we do at APM (what the heck do we do? Find out here), we started to wonder how these two great cities would do if they were duking it out for best place to own investment property.
Both cities are known for their epic outdoor scenery and active lifestyles while maintaining the benefits of urban living. And they seem to be pretty similar–their populations are 634,264 (Denver) and 634,535 (Seattle), they both came out of economic depressions when gold was discovered, and both are in states that have legalized recreational marijuana sales (which has been a pretty hot topic lately).
But there are some differences.
So, if you are looking to buy a Seattle or Denver investment property for a rental or a second home, or to move to either place, please read on! Of course we’ll look at real-estate data, but we’re also going to take a peek at fun stuff, like skiing and beer.
FIRST QUARTER: Real Estate and Rental Property
Seattle Gets A Field Goal (3 pts), Denver Gets A Safety (2 pts)
Seattle and Denver are both good places for landlords and real estate investors to make money. So, does Seattle rental property beat out Denver rental property? To find out, we looked at the Rental Health Index we created last year. The index uses various governmental data sources to rank the nation’s 75 biggest cities as hot spots or sleepers for investment real estate and rental properties.
And the winner?
The Emerald City ranked #27 in the nation and Denver #29. Housing values made the difference. They’re increasing faster in Seattle than in Denver, with Seattle ranking 20th in the nation with an appreciation rate of 5.7% compared to The Mile-High City’s more sluggish 3.4 percent appreciation, placing it at #56.
The great news for both cities is that Denver and Seattle are among the fastest-growing metropolitan areas in the nation. The RHI indicates Denver’s job market grew 2.64 percent from July 2012 to July 2013, while Seattle’s job market grew slightly more, up 2.93 percent during the study period.
SECOND QUARTER: Recreation
Seattle & Denver Each Get a Touchdown (6 pts each), But Seattle Gets an Extra Point
Seattle and Denver both offer fantastic recreational opportunities if you are active and love the outdoors. Does one have an advantage over the other? It depends on what you are looking for. When it comes to the overall city for outdoor lovers, Seattle outranks Denver. Seattle’s waterfront location on the Puget Sound provides ample water-based recreation, such as kayaking, paddleboarding, fishing, and even scuba diving. And Seattle is known for being very bike friendly. The Burke-Gilman trail, ample bike lanes, and ability to ride year round landed it at #10 best bike city in a recent survey, beating out Denver at #14.
If you’re looking to travel outside the city, nearby mountains in both Seattle and Denver offer great snow sports. Although Seattle is located near the North Cascade Mountains, and is close to Snoqualmie Summit, Denver offers more and better skiing. In a ranking of large cities with the most ski resorts within four hours, Denver squeezed out Seattle for the best skiing, snowboarding, and mountaineering, taking the #1 spot over Seattle’s #2. Finally, if you’re a mountain biker, epic trails are within a couple of hours of both cities.
THIRD QUARTER: Lifestyle
Seattle & Denver each get a touchdown (6 pts each) and a field goal (3 pts each).
Beer is good. At least, that’s what the populations of Denver and Seattle seem to think. Both cities produce an impressive assortment of craft beers and microbrews. Denver is also known for it’s location near bigger brewers, such as Coors Beer, which may or may not be a good thing depending on your status as a beer snob and your politics.
In Travel & Leisure’s America’s Favorite Cities survey, Denver ranked #2 for Best Beer City. Although there are only a few breweries in the city of Denver, there’s an impressive number outside the city, so we’ll cut Denver some slack and give them points for having lots of good beer nearby. Plus Denver hosts the Great American Beer Festival every year, and it’s the largest beer festival in the nation, which is impressive. Seattle, coming in at #4 in the survey, boasts several local breweries, including Maritime Pacific Brewing in Ballard, Pyramid, and Fremont Brewing. However, in CNN’s list of the 8 Best Beer Towns, Denver ranked #5, and poor Seattle didn’t even make the list.
Score: Denver gets a touchdown, Seattle gets a field goal.
Seattle Loves Dogs More Than Denver. Well, at least according to Estately, which ranked the top 17 dog cities. According to Estately, when looking at factors such as weather, Walk Score, doggie-activities, size of yards, dog-focused Meet-Up groups, and number of dog sitters, Seattle ranks #3, with Denver lagging behind at #16.
How did Seattle beat out Denver (or send Denver to the dogs? sorry, I couldn’t resist) Seattle boasts 14 dog parks compared to Denver’s 9. And further tipping the scales in favor of Seattle is that the city allows dogs on buses, ferries, and light rail, and there are 32 Meet Up groups for dog lovers. Apparently Denver’s so-called “300 days of sunshine” weren’t enough to boost it past Seattle, at least according to Estately.
Score: Seattle gets a touchdown, Denver gets a field goal.
FOURTH QUARTER: Education
Denver & Seattle Each Get a Field Goal (3 pts each)
And what about public education? Seattle beats Denver on test scores, according to?Greatschools.org, which?reports that Denver scores 5 out of 10 points, while Seattle scores 6 out of 10. However, Seattle beats Denver in graduation rates. In 2012 the Seattle public high school graduation rate was 73%, while Denver’s was 58.8 percent. However, these rank close to one another so each receives a field goal.
GAME OVER. Final Score?
Seattle: 22 Denver: 20
Perhaps I should have mentioned at the outset that allpropertymanagement.com is a Seattle-based company, and I lived in the city for ten years?
On the flip side, I left Seattle because the weather really did bum me out! And Denver is one of my favorite cities! I’ve been there a few times on my way to Fruita and Moab to ride my mountain bike, and I have to say, Denver has a great feel. Downtown Denver has great pedestrian areas and fantastic food. If I had to pick a city to live in again, or to buy a second home in, I’m pretty sure it would be Denver.
The fact is that both Seattle and Denver each have great sports teams and enthusiastic fans, amazing recreational activities, and they each present considerable lifestyle and investment opportunities.
Cheers and enjoy the game!
A NOTE: So, I realize I could have picked other categories to review – what would you have picked?
By Tracey March