17 Rental Property Tax Deductions Landlords May Claim Each Year
Tax time for rental property owners is usually a headache that involves looking up tax laws and tracking your rental income and operating expenses so you can complete your tax return. Even though it takes a lot of time, finding rental property tax deductions can help cut back on the amount you might owe. And you need to go through the same process for each of your multiple rental properties.
Here are some details on rental property tax deductions. Though, if you need help, it's always a good idea to consult a tax professional for the best tax advice.
What tax forms do I need for my rental property?
When you own rental property as an individual, you'll complete a Schedule E with your Form 1040 personal tax return. This form lets you report your rental property income and deductible expenses.
If you've started a rental property business, such as an S corporation or LLC, you'll use Form 8825 to report income and expenses for your rental business. You can prepare the tax return for your rental properties yourself or hire a tax professional, who will know all the tax rules.
How do I report rental income?
Rent received from your rental property is taxable income. But, you can reduce your taxable income by taking several tax-deductible expenses. Some rent proceeds count as qualified business income if they meet certain safe harbor requirements, as specified by the Internal Revenue Service. To qualify, you must have a separate rental business with its own recordkeeping of business expenses and revenue. Talking to an expert will help you know for sure.
Be sure to keep track of your rental income throughout the year, using a spreadsheet, accounting software or even a logbook. Doing so will let you easily identify any unpaid rent during the year for the home, which is your personal property, and tally up the total amount you received from your rental real estate for the tax year.
What landlord tax deductions can I take?
As a rental property owner, you can deduct most of the ordinary and necessary expenses for your rental properties. You're going to need to keep good records of all expenses paid for the rental property. It's recommended to hire a tax professional or tax attorney to help with your tax returns. Here are several rental property tax deductions that you can take:
1. Advertising costs
In order to get tenants, those in the market have to know about your residential rental property. Putting up an online property listing or running an ad is a great way to give your property exposure and generate leads. And, you can deduct expenses related to the cost of advertising.
2. Mortgage interest
When you buy an investment property to rent out, you'll likely get a loan and you can deduct the mortgage interest. Of all the rental property tax deductions, this can potentially be your biggest, as it's a large rental property expense. Interest on loans up to $750,000 is a tax-deductible expense. Your lender will send you a Form 1098 at the end of the year letting you know the total mortgage interest you paid. You can also deduct loan origination fees and other expenses related to your home loan.
You also might be entitled to deduct interest you pay on a traditional second mortgage, such as a home equity loan or home equity line of credit. However, you must use the loan to "buy, build or substantially improve the taxpayer's home that secures the loan," according to the IRS.
3. Other interest
There are other kinds of interest considered a rental expense. This includes interest paid on personal loans or credit cards to pay expenses for the rental unit or the interest you pay on services or goods purchased to keep your rental property in good working order.
Your property is an asset, so you can't just immediately deduct its cost from your taxes. You have to spread it out over several years. Over time, as the home loses value, you can claim depreciation on your taxes. Make sure to report your property with the proper depreciation schedule on your taxes, and you'll get a bit of a tax break every year. You can also depreciate major repairs or upgrades on the home.
Small, reasonable repairs made to the property are tax-deductible, as well. Note that these are generally small repairs that landlords pay, not large property improvements — those are assets and handled through depreciation. This includes the cost of parts and labor for making those repairs or hiring contractors to do it for you.
6. 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, a property manager or contractors, you can deduct what you spend on them, including workers' compensation insurance, health insurance and more, from your taxes.
7. Property management
Property managers handle the day-to-day of running your rental property business in exchange for a fee. You can deduct these property management fees.
8. Travel expenses
Whether you live on the other side of town or the other side of the country, you can deduct travel expenses. Although travel may seem like personal expenses, even long-distance travel expenses are deductible if they're related to your rental home or for business purposes. This is one of the areas where you really want good records — trying to claim too much is a major cause of audits and other legal trouble. You can deduct mileage, transportation expenses and other associated expenses of travel.
At the very least, you're going to need homeowners' insurance for your property, if not more. Everything spent on insurance premiums is deductible from your taxes. This can ease the burden of all those insurance premiums if they start to get a little too expensive. You'll likely need landlord liability insurance and a separate flood, fire or similar insurance policy.
10. Legal and other professional services
The accountant and attorney mentioned above? These professional services are a cost of running your business, so you can deduct legal fees and professional fees 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. You can also deduct court fees if you ever have to evict a tenant.
11. Screening tenants
Running credit checks, background checks and anything else you need to find good prospective tenants is a crucial part of your rental business. But the costs can start to add up fast, so make sure to keep the paperwork to deduct on your taxes later. However, this service is free for you through Rentals.com.
12. Utilities included in the rent
Another rental property tax deduction you might consider is the utilities for the rental property. If you pay for any of the utilities, those are a cost of business and deductible from your taxes.
13. HOA fees
If the community requires your membership to a homeowner's association, it's generally accepted that you'll have to pay fees and dues to that association. They're typically not that high, but you can claim them as a rental business expense and deduct them out of your taxes at the end of the year.
14. Pass-through tax deduction
If the business for your rental property is a pass-through entity, you can deduct up to 20 percent of your net rental income. This one gets a little complicated, though, so it's a good idea to talk to an accountant to see if you qualify.
15. 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 precautions with these, especially if you're taking the home office deduction — the IRS is especially strict on that item. You should never claim these deductions without the advice of an accountant or tax lawyer, but this one is especially fraught and known to trigger audits (or worse).
All the tax you pay on your rental property is an allowable deduction, including property taxes. Be sure to note the amount and date of your payments to the city, county and/or state. You can also deduct garbage and sewer taxes unless your tenants cover that expense directly. Also, don't overlook special tax assessments sometimes levied by cities for services such as sewer upgrades.
To calculate property taxes on your personal property, you'll need to know how much your home is worth or its fair market value. A professional appraisal holds the most weight, but written estimates from several real estate agents, as long as they match, will also do. The cost of getting an appraisal, as well as paying the property taxes, is deducted from your rental income.
17. Rental property losses
If you have lost income on your rental property or had a partial property loss, you can deduct some of these expenses. You can use losses from a passive activity, like owning rental property, to offset other income. You can deduct up to $25,000 in real estate losses, according to the IRS.
Rental property tax deductions you can claim
If you have income from renting out a home, you'll want to take all the tax breaks and deductions that you can. 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.