6 Tax Deductions Every Landlord Should Know
Investors who have made the move to income-generating real estate can take advantage of special tax breaks designed only for them. There are several tax breaks for landlords that let property owners reduce their tax obligations and keep more of their cash to put back into their golden goose.
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Tax Deductions for Landlords
Tax deductions for landlords fall into a few different categories. Some deal with money spent maintaining the property, others help landlords compensate for contract labor costs. Other deductions are related to things like fees paid for legal, financial, and other professional services. Understanding all of them is the key to keeping your cash. In a lot of cases, crafty landlords can slash their tax bills by claiming many or all of these deductions year after year.
Depreciation is one of the biggest tax deductions for homeowners–it’s the very first landlord expense the IRS discusses in Publication 527. Depreciation is so important because it lowers your taxable income without hurting your cash flow. You can start depreciating a property as soon as it’s ready for the rental market and depreciation must be taken over the life of the property. There is no better mechanism for recovering the cost of an income-generating property than through this capital expense.
Another big tax break is the interest deduction, which allows landlords to deduct any mortgage interest they pay to own the property. Things can get tricky if you refinance a mortgage on a rental property, so know the rules before you claim the deduction. You can also deduct certain expenses associated with obtaining a mortgage.
3. Repairs and Improvements
The IRS allows all kinds of deductions related to repairs, improvements, betterment, and even standard maintenance. There’s a big, long list of what you may and may not deduct, but generally, according to IRS Publication 527, “an expense for repairing or maintaining your rental property may be deducted if you aren’t required to capitalize the expense.”
When you’re a landlord, there is a good chance that you’ll have to do a little bit of traveling from time to time. This is true whether you have a property that is located across town or across the country. Sometimes you have to travel over to the property to put a “For Rent” sign in the front yard. Other times, you have to drive over to collect rent or to talk to the tenants of a property. If you’re traveling for business purposes for the rental property, you can deduct those travel expenses as long as you keep the receipts for itemized deductions.
5. Other Expenses
Other costs that you incur for the property might also be eligible for deduction. For example, if you paid insurance premiums for your house in advance, you can deduct the cost of those premiums. If you pay a property management company, you can also deduct those costs. Legal fees for the property are also eligible for deduction.
6. Home Office
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If you use an area in your house as a home office for the purpose of doing business for your rental properties, you can also take a home office deduction. With a home office deduction, you get to deduct a portion of all of the bills that you pay for your own house. This is done by calculating the square footage of your office in relation to the rest of your house and then deducting that percentage from all of your house bills. For example, you can deduct a percentage from your mortgage, from your utilities and from your homeowners insurance costs.
Regardless of whether you are a landlord or a renter, you need to do your homework to make sure that you’re getting all of the tax breaks that you are entitled to.
Paying taxes is your duty as an American citizen, but overpaying is not a requirement. The team at www.InsuranceSwami.com encourages renters to take advantage of every tax deduction legally available.
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Andrew Lisa contributed to the reporting for this article.
Last updated: Feb. 22, 2021