Category: Taxes & Finances
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
By Tracey March
Compared to 2006, homes today are more affordable but qualifying for a mortgage is more difficult. If you want to sell your rental home more quickly and you don’t need the cash immediately, you can increase your pool of potential buyers if you finance the sale yourself. This requires thinking outside the box and a willingness to be flexible, but if you find a buyer you’re comfortable with and get good legal advice, it can be a win-win situation for both parties, with less paperwork and closing expenses to boot.
Seller financing is just that–the seller finances the sale of the real estate. With seller financing you forgo getting all of your cash at closing and instead put the buyer on a payment plan. There is a great deal of flexibility with payment options, depending on your and the buyer’s needs:
- The down payment can be large or small.
- Buyers usually pay on a monthly basis over a specified term, and often with a balloon payment due on or before a certain date.
- Buyers can send payments to you directly, but the preferable option for both parties is usually to have the payments go through a title company, which tracks payments and interest. The title company will also hold title documents for the parties and record them when the payments and interest have been made in full, which assures the buyer that when the loan is paid, the appropriate documents are recorded.
- Interest rates are typically higher than conventional loan rates, but be careful not to violate your state’s usury laws.
There are typically two ways for a seller to finance a real estate deal: the buyer gives a promissory note (detailing the repayment terms) and a Deed of Trust is recorded, or the seller and buyer enter into a Real Estate Contract (or land contract), which is recorded. A key difference between these two options is that with a note and deed of trust, title to the property transfers to the buyer. However, with a real estate contract, the seller retains title until the property is fully paid for. Typically, in the case of a default, a real estate contract is the preferred option for the seller because the process of getting the property back is more efficient.
Because real estate financing options vary by state, make sure you consult with an attorney to find out what options are available to you and their costs and benefits.
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.
Federal lawmakers should simplify the tax code carefully, according to the National Association of Home Builders, because the current level of complexity impedes small business activity and economic growth.
The NAHB states that most home builders and many other small businesses are organized in such a way that their owners pay individual tax rates on net business income, which means tax changes meant to affect people could also impact companies. For example, some have proposed setting lower corporate tax rates and reducing the number of tax breaks. Small businesses which pay individual rates could lose their tax breaks without being compensated by the lower rate if lawmakers do not account for their situations.
“The home building community supports simplifying the tax code as part of a comprehensive tax reform process,” one home builder told Congress in testimony. “Such an effort should only occur after a thoughtful and deliberate vetting process that examines proposed changes, necessary transition rules and economic impacts.”
The NAHB noted that changes to dividend and capital gains tax rates could affect investors and rental properties in particular. By extension, they could have indirect effects on property management companies and other industry stakeholders even if there is no direct impact.