Don’t Forget About These Rental Property Tax Deductions
There's usually a headache that comes with doing taxes for your rental home, such as tracking your income or finding all the tax codes you have to include within paperwork. Even though it takes a lot of time, determining your rental property tax deductions can be beneficial in the long run. Here is some information on the many tax deductions available for landlords.
It’s easy to forget that you’re running a business, but remembering that is key to taking advantage of any rental property tax deductions. You’re going to need to keep good records of all the money you spend and receive related to your rental, and it’s highly recommended to have a good accountant and tax attorney if you can afford them. They’ll be able to give advice on exactly what you can do, but these are good starting points:
- Advertising costs: In order to get tenants, those in the market have to know you’re renting the place out. Putting up an online property listing is a great way to give your property exposure and generate leads.
- Interest: Loans are almost unavoidable in the real estate business, and interest can make up a large amount of your expenses. However, of all the rental property tax deductions, it can potentially be your biggest. You can deduct the cost of interest on your mortgage, loans taken to improve the property and possibly other types of credit related to your rental. For loans that settled before December 15, 2017, the maximum allowable interest deduction is for loans up to $750,000. Your interest deduction can include:
- Payments to banks and credit unions to acquire rental property
- Interest paid on loans that include rental property
- Interest you pay on services or goods purchased to keep your rental property in good working order
When setting up your record keeping, break out the interest from money you escrow for taxes and insurance. Those costs are itemized separately.
- Depreciation: Your property is an asset, so you can’t just immediately deduct its cost from your taxes. Over time, as it loses value, you can deduct that from your taxes. Make sure to report your property with the proper depreciation schedule on your taxes, and you’ll get a bit of a break on your taxes every year.
- Repairs: Small, reasonable repairs made to the property can be taken as tax deductions. Note that these are generally small repairs, not large improvements — those are considered assets that need to be handled through depreciation. This includes the cost of parts and labor for making those repairs or hiring contractors to do it for you.
Related: How to Deal With Tenant Damages
- Wages for employees and independent contractors: If there’s just too much work for you to do by yourself, you'll need to hire help. Whether they’re employees, property managers or contractors, you can deduct what you spend on them from your taxes.
- Travel related to the rental business: Whether you live on the other side of town or the other side of the country, traveling for business purposes can be deducted from your taxes. This is one of the areas where you really want good records — trying to claim too much of your travel expenses is a major cause of audits and other legal trouble.
- Insurance: At the very least, you’re going to need homeowners’ insurance for your property, if not more. Everything spent on can be deducted from your taxes, which can ease the burden if insurance is starting to get a little too expensive. Do you have a separate flood, fire or similar insurance policy? Check to be sure, but it can probably be deducted as another tax benefit.
- Legal and other professional services: The accountant and attorney we recommended above? They’re a cost of running your business, so it can be deducted from your taxes. As an added benefit, they can help you find more rental property tax deductions, often for more than you’re paying for their services, saving you both stress and money overall.
- Screening tenants: Running credit checks, background checks and anything else you need to determine if someone is a good tenant can start to add up fast, so make sure to keep the paperwork to deduct from your taxes later. However, this service is free for you through Rentals.com.
- Utilities you pay for: Another rental property tax deduction you might consider is for paying the utilities for the rental property. If you pay for any of the utilities, those are a cost of business and can be deducted from your taxes.
- HOA fees: If the community requires you to be part of a homeowner’s association, you’ll have to pay fees and dues to that association. They’re not likely to be that high, but being able to take them out of your taxes at the end of the year can be a nice little bonus.
- Pass-Through tax deduction: If the business for your rental property is a pass-through entity, you may be able to deduct up to 20% of your net rental income. Since this one is relatively new, be especially sure to check that you really qualify for this deduction before trying to take it.
- Interest paid on a first mortgage: As a landlord, you're entitled to deduct the interest you pay on a first, or “primary," mortgage each year.
- Interest paid on second mortgage: First mortgage interest isn't the only qualifying deduction. You're also entitled to deduct interest you pay on a traditional second mortgage. Effective starting tax year 2018, interest paid on a Home Equity Line of Credit is no longer deductible. So if you're planning to borrow additional funds for improving your property, be sure to carefully consider the pros and cons of the second mortgage or home equity line of credit before signing on the dotted line.
- Closing costs: You may be able to take out the closing costs from your taxes. It’s a cost of buying the property, so it probably counts for you as a business expense.
- Office space: Whether you run everything out of your home office or have a small office to manage your properties, you can deduct those from your taxes. Make sure you take special precaution with these, especially if you’re taking the Home Office deduction — the IRS is known to be especially strict on that particular item. You should never claim deductions without the advice of an accountant or tax lawyer, but this one is especially fraught and known to trigger audits (or worse).
- Taxes: All the tax you pay on your rental property is an allowable deduction. Be sure to note the amount and date of your payments to the city, county, and/or state. Garbage and sewer taxes may also be deducted, unless your tenants cover that expense directly. Also don't overlook special tax assessments sometimes levied by cities for services such as sewer upgrades.
- Appraisal and property taxes: To calculate property taxes properly, you’ll need to know how much your home is worth. A professional appraisal holds the most weight, but written estimates from several realtors, as long as they match, will also do. The cost of getting an appraisal, as well as paying the property taxes, can be deducted from your rental income.
If you have income from renting out a home, you’ll want to take all the tax breaks and deductions that you can manage. Do the calculations above, or get a good tax lawyer or accountant and use this list as a starting point. You just may discover some extra rental property tax deductions that come with being a landlord.