What Tax Deductions Can Landlords Claim?
Owning a rental property is an excellent source of income, but it can also be expensive to run. That’s why savvy landlords take advantage of tax deductions where they can as a way to reduce the overall cost of managing a rental property. From plumbing problems to your electric bill, knowing what tax deductions landlords can claim is a valuable lesson for every investor. However, navigating the complex world of tax deductions can be overwhelming, especially for those new to the rental property game.
In this article, we’ll explore some of the most common tax deductions that landlords can claim, including expenses related to property maintenance and repairs, insurance, and mortgage interest. By understanding these deductions, landlords can maximize their savings while complying with all applicable tax laws and regulations.
What Tax Deductions Can Landlords Claim
Landlords can legally claim various tax deductions related to their rental properties. However, landlords must keep accurate records of all expenses related to their rental property to claim these tax deductions. In other words, when filling out your Schedule E form during tax season, you must back up your claims with evidence such as receipts and invoices. If you struggle with accounting and bookkeeping, you can discuss with an expert local property manager to help you track finances better. It’s also a good idea to consult with a tax professional or accountant to ensure that all deductions are adequately claimed and to stay current on any tax law changes.
Qualified Rental Expenses
- Property Maintenance and Repairs
One of the most popular rental expenses landlords can deduct are for repairs and maintenance. Anything that preserves the habitability of your home, from fixing leaking roofs to repainting and replacing broken locks, qualifies for a tax deduction. However, it’s vital to note that the IRS doesn’t allow property owners to write off the cost of improvements or upgrades that add value to the property.
- Mortgage Interest
Another popular tax deduction is mortgage interest. Landlords can deduct the interest paid on their rental property mortgage, which is typically a significant deduction depending on your source of financing. For example, if you paid cash outrightly for a property, this expense might not apply to you. But writing off interests on a hard money loan could help you save thousands of dollars. It also reduces the burden of trying to break even, especially in the early years of a mortgage when most of the payments go toward interest.
- Property taxes
Landlords can deduct property taxes paid on their rental property. This includes any special assessments or fees levied by local governments.
Although real estate is an excellent hedge against inflation, there’s an understanding that the structure of your rentals is bound to depreciate over time. Thus, landlords can use a complex formula to reduce their tax liability by claiming depreciation costs. Since you can deduct this cost for up to twenty-seven years, learning how to claim depreciation on a property would be handy.
If your rental agreement states that the property owner is responsible for providing utilities such as gas, water, electricity, garbage removal, and so on, you can also deduct this expense. Since utilities are vital to keeping every home habitable, these bills are exempt from your taxable income.
Landlords can deduct the cost of insurance premiums for their rental property. This deduction includes property insurance, liability insurance, and landlord insurance. Deductible expenses may also include any losses covered by the insurance policy, such as damage from a fire or storm. Also, if you offer your employees health insurance or worker’s compensation, you can deduct this from your taxable income.
- Professional services
Running a rental property is a lot of work, and you might need to consult and hire several experts to ensure your business remains on track. Professional services you may seek include accountants, attorneys, property managers, and cleaning or landscaping services. Thankfully, the IRS lets landlords deduct these fees when they hire independent contractors.
- Travel Expenses
Finally, landlords can deduct expenses related to travel to and from their rental property. This includes gas, lodging, and meals. For example, when a tenant calls you to perform a repair, you expend the fuel in your car during your trip. Hence, you can use the IRS standard mileage rate to deduct your vehicle expenses from your tax liability. But only if the travel is to manage the rental property.
In conclusion, understanding tax deductions is crucial for any investor to succeed as a property owner. By keeping detailed records and staying up-to-date on tax laws, you can claim various deductions to help offset the costs of maintaining rental properties. From expenses related to repairs and renovations to insurance and mortgage interest, numerous tax deductions available to landlords can significantly reduce their liability.
As always, it’s essential to consult with a qualified tax professional to ensure compliance with all applicable laws and regulations and increase your tax savings. You could also hire a professional property management company with experience maximizing rental returns and assisting landlords with their duties.