Did you know that many tax deductions for landlords can help you save money during the tax season? Managing a rental property comes with some expenses, but you may be eligible to deduct them.
Overall, landlords can claim tax deductions for different expenses, such as insurance programs, mortgages, repairs, administrative costs, interest payments, and many more.
Since landlord tax write-offs can vary depending on your circumstances, understanding the possible deductions available can help you reduce the tax bill and keep more of what you earn from your real estate investment.
Do you want to know the common 16 tax deductions for landlords and save money during the tax season? Read on to find all the information you need!
- Rental property owners can deduct costs related to owning, operating, maintaining, and taking care of a property from their tax bills.
- The value of the land cannot be depreciated, but landlords can depreciate the initial cost of the property.
- Landlords may be required to pay personal property taxes, but items used in rental businesses may be tax-deductible.
- There are rental property tax deductions and expenses that apply only to real estate business owners.
- Landlords can deduct workers' wages as a rental business expense, even if they're employees or independent contractors.
- Business-related travel can be part of your tax benefits if you own a rental property.
Top 16 Tax Deductions for Landlords
Landlords often incur different deductible expenses, but interest payments are the biggest. These are the options that commonly fall into this category:
- Mortgage interest payments if you didn't purchase the rental property outright but used a loan
- Mortgage interest payments if you used loans to improve your rental properties
- Interest on credit card debt if you used it to pay for goods and services for your rental property
Interest payments are well-known tax deductions and apply to all homeowners. If you're a landlord, it may be the biggest deduction on your tax claim.
However, there's a special rule for landlords who have accumulated $25 million or more (this sum is adjusted annually based on inflation levels) in average gross receipts in the last three years. They can only deduct up to 30% of their adjusted taxable income.
This limitation on tax deductions is also known as Section 163(j) Limitation. If you want to avoid it, you must agree to depreciate your rental property over 30 years.
If you make repairs to your rental properties, you can also consider this significant tax deduction. According to the Internal Revenue Service (IRS), this category includes two types:
- Improvements to the property, made to add value to the rental unit
- Work to return things to their original condition, also considered maintenance
Expenses for repairs are fully deductible as long as you include them in your tax claim the same year they're incurred. Additionally, these costs must be reasonable, ordinary, and necessary.
Repainting walls, fixing floors, gutters, and leaks, replacing broken windows or doors, and plastering are a few repairs that may fall into this category.
However, deciding whether the expense is a repair or improvement for tax purposes can be difficult due to IRS rules. According to regulations, you can deduct repair costs in a single year, but improvements must be depreciated over 27.5 years.
What Does the IRS Consider to be an improvement?
The IRS issued a lengthy document with the regulations that you should consider to understand the difference between improvements and repairs. These rules say that rental properties are "improved" if the process involves the following:
- Betterment: It applies if the change or work you did either fixed a problem or defect that was in the property before you bought it or physically enhance/enlarge it.
- Adaptation: It refers to when you plan to use the property for a different purpose, considering why you originally purchased it.
- Restoration: The changes you made either rebuilt the property or brought it to like-new condition.
The acronym "BAR" lets you know if the repairs you've done fall into one of these categories. As such, it indicates whether the work should be considered an improvement and, consequently, be deducted from the tax bill.
However, there are more things to consider. Was your property affected by a particular event, such as a storm? In that case, you must compare the unit's condition before the disaster with the property's condition after the repairs are made.
Contrastingly, if you correct normal wear and tear on your property, you should also compare its condition after you last fixed anything with its condition after the last maintenance or improvement work.
Landlords who want to make these tax deductions but own properties that have not been repaired or improved can use the unit's condition when it was placed in service for comparison.
#3 Depreciation for Rental Real Property
Depreciation can also be another of the biggest tax deductions for rental property owners. These write-offs are popular because they can help landlords reduce their taxable income without affecting their cash flow.
However, land cannot be depreciated. Therefore, these deductions consist of allocating the highest possible percentage of the property's purchase price to the building in order to maximize this expense.
Many people use cost segregation studies and bonus depreciation to increase this deduction. In some cases, when landlords are considered real estate professionals for tax purposes, these passive losses can be used to offset income from other sources.
The actual cost of a rental property is not fully deductible in the same year that you pay for it. Therefore, as a landlord, you can recoup that expense through depreciation. Overall, for residential real property, this process involves deducting the cost over 27.5 years.
In addition, rental property owners can greatly benefit from these deductions even if the value of their properties increased.
#4 Personal Property
Many landlords also own personal property that is used as part of their rental business. This usually includes appliances, furniture, and carpeting. Maintenance equipment, computers, and gardening tools may also fall into this category.
As a rental property owner, you can deduct the costs of these items in just one year using the minimis safe harbor deduction. However, it applies to objects or belongings with a value of up to $2,000.
If your property was purchased and put into service between 2018 and 2022, you can also deduct these expenses using a 100% bonus depreciation.
#5 Pass-Through Tax Deduction
As of 2018, the Tax Cuts and Jobs Act makes some landlords eligible for a pass-through tax deduction. However, it isn't a rental deduction but a special income tax deduction.
In other words, this allows you to reduce your effective income tax rate on the income you earn from your rental business.
If you want to calculate the pass-through deduction, you must consider your annual taxable income. However, current rules establish that landlords can reduce up to 20% of their net income or 2.5% of the amount they paid for their rental property plus 25% of what they pay to employees.
It's important to remember that this deduction is set to expire in two years.
#6 Local Travel
If you own a rental property, you can also benefit from a tax deduction for travel, as long as it's related to your business activity. Landlords can deduct most of the driving they do for these tasks.
Here's an example that can help you understand how this deduction works: When a tenant complains or you must drive to a store to buy materials for a repair, you can deduct these travel expenses during the tax season.
However, this tax deduction doesn't apply if the trip was related to work to improve the rental property. Instead, you must add these expenses to the property's tax basis and depreciate them over several years.
Landlords who use a car, pickup, van, panel truck, or SUV for their rental activities can choose one of the following two options to deduct their vehicle expenses:
- Use the standard mileage rate based on the IRS's current rates
- Deduct actual expenses, such as repairs, upkeep, and gasoline
However, you should consider that deducting the standard mileage rate is not possible if you don't use it to deduct these expenses the first year you use your vehicle.
If you're not sure whether to deduct the actual expenses or the standard mileage rate, choose the latter option for the first year. As a result, this alternative will be available in the future.
Overall, local travel deductions may include parking, tolls, licenses, and repair expenses.
#7 Long-Distance Travel
Landlords who must travel overnight for a business-related activity can also deduct other expenses, such as meals, airfare, and hotel bills.
However, deductions for overnight travel are closely scrutinized by IRS auditors.
Ideally, you should document your expenses and have proper records to back up your deductions for overnight travel if you plan to claim them.
#8 Employees and Independent Contractors
Managing a rental property may also involve hiring employees or contractors to perform services related to your rental activity. In this scenario, landlords can deduct workers' wages as part of their rental business expenses.
It's important to note that these tax deductions apply whether you hire an employee, such as a resident manager, or an independent contractor, such as a cleaning expert or repair person.
In addition, the IRS has set unique rules about how rental property owners should treat independent contractors. However, hiring them is often beneficial, as landlords should not withhold federal taxes from workers' paychecks or pay one-half of their Social Security and Medicare taxes.
Employee meals and entertainment activities for workers, such as summer outings or birthday parties, may also be fully deductible.
#9 Home Office
Do you conduct your rental business from a specific space in your home? It can also be considered a deductible expense. However, you must meet certain minimum conditions to be eligible for this tax deduction.
These tax deductions are popular for many reasons. First, they apply to any space devoted to office work, even if it's not an entire room, as long as you use it exclusively for your rental activity. In this regard, this category may include the following:
- Spaces you use to meet with clients and customers
- Areas used for office work related to the rental business
- Any other workspace you use for tasks related to your rental property
As another advantage, this tax deduction is available to renters and homeowners. If you want to calculate the sum to find the largest possible deduction, you can consider the following methods:
- Calculate the space's or room's square footage and divide it by the entire house's square footage. You can also divide the rooms of your business space by the number of rooms in your house if all of them are the same size
- Multiply the prescribed rate, which is set by the IRS, by the allowable square footage used on your home
As a landlord, you may also be eligible to deduct premiums for almost any insurance related to your rental business, including coverage for damages caused by theft, fire, and flood.
Premiums for landlords' liability insurance may also fall into this category. In addition, you could deduct expenses related to health and workers' compensation insurance if you offer this coverage to your employees.
#11 Legal and Professional Services
If you're a rental property owner, you can also deduct what you pay to accountants, attorneys, property management companies, real estate investment advisors, and other professionals if you need their services for your rental business.
These fees or payments must be deducted as operating expenses. However, as mentioned, you must prove that the services are exclusively used for your rental activity.
Professional assistance can be deducted from your tax bill in different ways. If you consult a tax professional, which is recommended, you can also deduct the fees you pay to these experts.
#12 Capital Expenses
Some landlords can also deduct long-term assets, but it's regulated by tax rules. Overall, there are two types of expenses that can be deducted, as they're incurred as a rental property investment. These are:
In simple terms, capital expenses are purchases you make expecting them to last at least a year and allow you to make a profit in the future. This group can include land, vehicles, or equipment.
However, the IRS treats capital expenses as investments. Therefore, you must capitalize and deduct them over several years.
As a landlord, you can deduct day-to-day operational expenses that keep your rental business running. This category may include utilities and rent costs.
A rental property owner can deduct 100% of the current expenses from their gross rental income as long as deductions are made the same year they're incurred.
#13 Operating Expenses
Besides expenses for professional and legal services, landlords can also deduct what they paid for items they purchased for the rental property throughout the year.
If they are deducted the same year that they're incurred, these costs can be handled as operating expenses.
However, it's important to consider the IRS rules on operating expenses, which are classified as "ordinary and necessary" to manage, maintain, or preserve rental property.
In this regard, the expenses that may qualify for these deductions may include the following:
- Paid utilities
- Insurance premiums
- Advertising costs
- Maintenance fees
#14 Casualty Losses
In some cases, rental property owners may also add property losses to their deductions if they were caused by an unexpected event, such as a fire or a natural disaster.
As a landlord, you may be able to claim property loss on your tax return as long as it is not covered by your insurance policy. If you have insurance coverage, you must reduce the amount claimed as casualty loss by any amount you recover or expect to receive through the policy.
Also, even if they were caused by a natural disaster or other unforeseeable events, you cannot deduct losses that are fully covered by your insurance policy.
Many landlords consider maintenance costs to be part of repair expenses, but this is a mistake. You can deduct the money you spent to keep your rental property in good condition even if something didn't break and needed to be fixed.
Doing landscaping and pool cleaning on a regular basis can be considered a deductible maintenance expense, even if there were no major issues to address or repair.
In addition, you can deduct expenses related to the purchase of tools or products necessary for upkeep or cleaning, such as paint sprayers, lawnmowers, and weed eaters. The same is true for janitorial items or cleaning equipment.
Sometimes, landlords must depreciate the value of these tools to be able to deduct them from their tax bill. If you want to know if you're eligible for this deduction, you should consult with a tax professional.
#16 Legal Fees for An Eviction
Eviction procedures aren't easy to handle. As a landlord, you don't want to have to evict tenants from your rental property. However, even though they're extremely stressful and can cause headaches, evictions are often necessary.
Also, if you must evict tenants from your rental property or take legal action against lessees, you may be eligible for attorney and court fees deductions.
However, evictions often end in long court battles, which can cause many more expenses. Therefore, landlords should avoid them, if possible.
Tips on Rental Property Tax Deductions for Landlords
Whether you want to maximize your rental income or save during the tax season, deductions can greatly help. However, you must make sure you're handling them properly. These are other important tips that you should consider if you're a landlord:
- You can increase the depreciation deductions considerably for the first few years you own a rental property through cost segregation.
- Some scenarios allow property owners to rent out a vacation home tax-free. Use this option to your advantage.
- If you carefully plan your deductions, you can deduct costs related to the property improvement that you would otherwise deduct over 27.5 years in a single year.
- If possible, seek advice to understand and claim tax deductions in order to save long-term. Small landlords can deduct up to $25,000 in rental property loss annually. This would help you save a lot.
- There's a special tax rule that allows some property owners to deduct 100% of their rental property losses each year with no limits on the amount.
- If you rent out your property to family or friends, you can lose almost all of your landlord tax deductions. Consider this possibility before renting out your unit if you plan to deduct expenses to save or maximize your earnings.
Note: Cost segregation is a tax-deferring strategy that real estate investors and landlords use to accelerate their depreciation deductions by segmenting the property into various depreciable categories in order to increase cash flow.
Understanding the Tax Treatment of Rental Income and Losses
Since real estate ownership and management are considered passive activities, the landlord's level of participation in the business determines the tax treatment of property-related losses and income.
According to the IRS, a person who spends more than 50% of their working hours in their rental business is considered a real estate professional, including those who handle development, acquisition, construction, and management tasks.
Those who devote over 750 hours annually working in rental properties also qualify as real estate professionals. In these cases, their activities are not treated as "passive." Consequently, the income they generate is qualified as "active."
Therefore, some landlords can use losses to offset their income – such as wages, interest, or salaries – and avoid the 3.8% net investment tax that applies when rental properties are used as a source of income.
In addition, the tax treatment may vary depending on the type of participation as follows:
- Material participation: Rental property involvement receives a non-passive treatment if landlords materially participate in the business as real estate professionals. As a result, they can use losses to offset other types of income. Also, they aren't subject to the net investment tax.
- Active participation: It's a lower level of involvement that describes property owners who make significant management decisions, such as approving new tenants or establishing rental terms. Whoever falls into this category and has at least 10% interest in the investment can deduct some losses.
- Passive activity: Those who view the property as a sideline investment and don't materially participate in the business perform a "passive activity" fall into this category. In these cases, losses can be used only to offset income from that passive activity.
Should You Get Help From a Tax Professional?
Rental property tax deductions can benefit you enormously, but they aren't easy to handle. In addition, you must understand the IRS regulations and rules in order to claim some expenses as part of your tax return.
Therefore, hiring a tax professional is always the best course of action. With the help of an expert, you can determine if you're eligible to recover some expenses by deducting them as part of your rental business.
Also, if you must prove some expenses to make them tax-deductible, a professional can help you understand the ins and outs of the procedure.
As you can see, there are different landlord tax deductions available. Unfortunately, many rental property owners are not aware of these alternatives and lose the opportunity to recover expenses that are tax deductible.
However, almost all of the expenses you incur as part of your rental activity can be deductible, helping you maximize your rental income and your investment, and save in the long run.
You just have to know which expenses are tax-deductible and seek advice from a tax professional to take advantage of them.
Overall, as mentioned, you can recover the money you spent on mortgage interest, capital improvements, repairs, travel, fees to lawyers or consultants, maintenance tools, and more.
In some cases, you can also claim the wage you pay to your employees or expenses related to a home office for your tax return. However, you must make sure you can prove that they're exclusively related to your rental business.
DoorLoop Can Give You a Hand!
Landlords have a lot of work to do! Fortunately, they can use multiple resources to make the rental process easier and better understand tax regulations and rules.
At DoorLoop, we want to help! Therefore, we offer high-quality, well-research articles on each state's rental laws. You'll find plenty of information, including regulations on security deposits, eviction, and more.
Plus, if you don't have enough time to handle all the paperwork related to your rental business, we also have many tools to offer, including free forms and templates for a lease agreement, rental application, real estate purchase, and security deposit return. Take a look at our website and find everything landlords need!