By: Ben Luxon
Keeping careful records of income and expenses are, maybe not the sexiest part of being a landlord, but it’s definitely one of the most important. Landlords are entitled (in most cases) to deduct up to $25,000 worth of expenses each year from their taxable income. Failing to keep good records could see you leaving money on the table.
When it comes to working out your tax deductions, what can and can’t you deduct? In this article, we explore 8 major tax-deductible expenses that landlords can take advantage of to minimize their income tax bill at the end of the year as well as how the right software like Landlord Studio can be an invaluable tool to help you keep your books in order.
1. Repairs & Maintenance
As we mentioned above, the cost of improvements on a property cannot be deducted. However, the costs of repairs and general maintenance expenses can. Essentially, any expenses that are necessary to maintain the current condition of the property. These costs must be deemed necessary, reasonable and ordinary.
A few examples of ordinary maintenance and repair costs include:
- Plumbing repairs;
- Replacing broken windows;
- Rental of necessary tools etc.;
- Pool maintenance and cleaning;
- Pest control;
- Gardening/landscaping or tree trimming.
Interest can often be a sizeable deductible expense for landlords. Three key expenses where the interest is deductible are:
Interest on mortgage payments;
The actual mortgage itself is not deductible.
Interest on loans taken out for the purposes of improving the property;
The actual costs incurred for improving a property are not themselves deductible.
Interest on credit card payments that have gone towards goods and services for a rental property.
Interest on these items can quickly begin to add up which makes the ability to offset these payments against one’s taxes potentially very valuable for landlords indeed.
3. Depreciation of the Property
The value of a property can be depreciated over a period of 27.5 years and deducted against the properties profits. For example, for a property worth $150,000 you would be able to deduct $5,454.54 each year for 27.5 years until the property is fully deducted.
However, It is worth noting the following two things:
The IRS will claim a portion of the depreciated value back upon the sale of the property. This is called depreciation recapture.
Only the value of the property itself is depreciable - not the land that the property is built on.
4. Personal Property used in the Rental
You can deduct the cost of any items or furnishings that are owned by the landlord but used in the rental property. For example, any furnishings or white appliances like a fridge freezer, dishwasher etc.
The cost of personal property used in a rental activity can usually be deducted in one year using the de minimis safe harbor deduction (for items costing up to $2,000) or 100% bonus depreciation which will remain in effect until 2022.
5. Travel Expenses
Landlords are entitled to deduct travel expenses when traveling to their properties for the purposes of managing and maintaining their rental property. For example, you can deduct travel expenses incurred when driving top you rental to do a routine inspection or deal with a maintenance request. You can deduct at the standard mileage rate which for 2020 is 57.5 cents per mile.
It’s important to note, however, that landlords cannot deduct travel expenses when the reason for travel is to make improvements to the property. Instead, these expenses must be added to the property’s tax basis and depreciated with the property over 27.5 years.
You may also be able to deduct expenses when traveling overnight including airfare and hotel bills. These kinds of expenses are closely scrutinized however, so it’s important to keep excellent records.
6. Pass-Through Tax Deduction
Pass through tax deduction, formally known as the Section 199a Qualified Business Income Deduction, was part of the Tax Cuts and Jobs Act, which went into effect in the 2018 tax year. The end goal is to encourage Americans to start small businesses and engage in other entrepreneurial ventures.
At a basic level pass-through tax deduction lets U.S. taxpayers deduct as much as 20% of their business income that comes from “pass-through” entities such as:
- Sole Proprietor;
- S Corporations;
- C Corporations.
This deduction is scheduled to expire after 2025.
7. Property Management Fees
If you employ a property management company or if you use a software like Landlord Studio to help you manage your property you may be able to deduct this as a business expense. Other expenses in line with this that are often allowable include listing fees or expenses.
8. Legal Fees and Services
The final item on this list is fees you pay to accountants, attorneys, or other professionals and advisors that help you in the running and management of your real estate business.
You can deduct these fees as operating expenses as long as the fees are paid for work related to your rental activity.
This also covers any costs for legal actions required to recover unpaid rent.
There are many miscellaneous costs that come with owning a rental property. These costs can quickly add up. However, as we mentioned at the beginning of the article the IRS allows most small landlords to deduct as much as $25,000 from their taxes to ease this burden and help landlords get their properties into the green.
This is why it’s so important to keep immaculate records when tracking your income and expenses. Software like Landlord Studio means this has never been easier. Easily keep track of income and expenses, generate professional reports and gain a clear financial overview of your property portfolio from the app. They’ve even got a Schedule E report that you can print out at the end of the year to help save landlords hours of time when filing their taxes.