The billionaires of the world are not doctors or lawyers, they’re entrepreneurs. Specifically, they are people who started their own businesses, whether those businesses are online, brick and mortar, or real estate empires.
Starting and owning a business provides a long list of tax advantages, and real estate investments provide all the usual tax advantages plus some extras unique to real property. Every expense associated with rental properties – plus some just-on-paper expenses – are tax deductible.
Still, you actually need to document all of the expenses you plan to deduct. That means keeping receipts, invoices and bills throughout the year as expenses pop up; to help with this, keep a separate checking account for your real estate expenses if you don’t already. Never swipe that debit card or write a check from that account without first getting documentation!
Before you jump into the rental property deductions checklist, make sure you’re up to speed on how the new tax law affects landlords’ 2017 tax returns.
Update: The Tax Cuts and Jobs Act of 2017 Impact on Landlords
While this is an enormous topic in itself, it’s worth mentioning here, especially noting how it affects landlords’ 2017 returns.
We hosted an online masterclass earlier this year detailing this topic, and will continue updating and expanding our article content as 2018 continues. (If you want to be notified of future webinars by email, sign up for our mailing list – you even get access to our free mini-course on buying 2-4 multifamily rentals!)
The most important change that impacts landlords’ 2017 tax returns is the new bonus depreciation rules.
Any property improvements made after September 1, 2017, with an expected lifespan of 20 years or less, can now be deducted in full on your 2017 tax return (rather than being depreciated over time).
That includes personal property in your rental, such as appliances, property updates such as new carpets, and new business-use devices (e.g. computers). It also includes land improvements, such as landscaping or new driveways.
Note that it still technically counts as depreciation however, not a deduction, even though it can now be taken all in one year. That means that it’s still subject to depreciation recapture when you sell your rental property.
While there are many other tax changes affecting landlords in the Tax Cuts and Jobs Act of 2017, we’ll be covering others in later articles. We’ll be hosting another webinar as 2018 tax season comes around as well, so hop on our mailing list and we’ll keep you posted about what you need to know about tax deductions as a landlord.
16 Tax Deductions for Landlords
Here are 16 rental property expenses you can deduct on your tax return, to keep more of your money in your pocket where it belongs. It’s not 100% exhaustive, as there are a few obscure tax deductions that only apply to a few landlords, but think of this as a rental property deductions checklist for the average landlord.
1. Losses from Theft or Casualty: If someone broke into your rental property last year, at least the costs are tax deductible. If your insurance paid you a claim, you’ll need to declare that though.
2. Depreciation: This is a handy “paper expense.” Much of the cost of buying your property can be written off as a tax deduction, although it must be spread over 27.5 years (don’t ask me where that number came from). Buildings lose value as they age (at least theoretically), so the IRS lets you deduct 1/27.5th of the property’s cost each year. Use an accountant to help you with depreciation though, because there are restrictions.
3. Repairs & Maintenance: New paint, new carpets, new roof, whatever; if you updated it in or around a rental property, it’s tax deductible. A word of caution though – if it’s a large improvement or replacement (e.g. a new roof), it may count as a “capital improvement,” in which case you’ll have to spread the deduction over multiple years, in the form of depreciation. Caution: A home used as your personal residence will not see tax benefits from ordinary repairs and upkeep.
4. Segmented Depreciation: Some improvements, such as landscaping and “personal property” inside the rental/investment property (e.g. refrigerators) can be depreciated faster than the building itself. It’s more paperwork, to segment the depreciation of certain improvements as separate from the building’s depreciation, but it means a lower tax bill right now, not in the far distant, unknowable future.
5. Home Office: This is a popular deduction, but it’s also one you need to be careful about, as it can trigger audits. You have to set aside a percentage of your home for only doing work/business/real estate investing-related activities, and that percentage of your housing bill can be deducted. Talk to an accountant about this, and keep the percentage realistic.
6. Travel: Another popular-but-dangerous deduction, you can deduct travel expenses if your travel was for your real estate investing business… and you can prove it. Many people get cute with this one, and when they go on vacation they’ll go see one or two “potential investment” properties and then write the entire trip off as a business expense. Whenever you plan on deducting travel expenses, put together as much documentation as you possibly can so that you can make a strong case that it was an actual business trip. For example, meet with a real estate agent in the area, and keep all of your email correspondence with them. Keep all listing information and investment calculations for any properties you visit. Track your mileage for all driving done to and from rental properties. C-Y-A!
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7. Closing Costs: Many closing costs are tax deductible, and others can be depreciated over time as part of your acquisition cost. Use an accountant with a deep knowledge of real estate investments, and send them the HUD-1 (settlement statement) for each property you bought last year.
8. Mortgage Insurance (PMI/MIP): No one likes mortgage insurance (other than banks). At least you can deduct the cost from your taxable income.
9. Property Management Fees: Paid a property manager to handle the headaches for you and field those dreaded 3AM phone calls from tenants? You can write off their management fees, including both monthly fees and tenant placement fees.
10. Property/Landlord Insurance: Like homeowner’s insurance for your primary residence, your landlord insurance premium for each property is also tax deductible.
11. Mortgage Interest: All interest you pay to your mortgage lender is deductible… makes it a lot easier to swallow the cost of borrowing in order to expand your real estate investment portfolio.
12. Accounting, Legal & Other Professional Fees: All professional fees associated with your rental properties are tax deductible. Bookkeeping, accounting, attorney, real estate agent and any other fees you pay out for professional services can be deducted from your taxable income. Don’t forget the cost of any bookkeeping software you may use.
13. Tenant Screening: If you paid for tenant credit reports, criminal background checks, identity verifications, eviction history reports, employment and income verification or housing history verification, those fees are deductible. But even better, have the applicant pay directly for screening costs as much as possible.
14: Legal Forms: Bought a state-specific lease agreement this year? Eviction notices? Property management contracts? The cost of legal forms is also deductible.
15. Property Taxes: Your property tax bill is, pretty intuitively, tax deductible. We won’t belabor this point – I’m pretty sure you get it.
16. Phones, Tablets, Computers, Phone Service, Internet: Bought a new phone this year? Maybe a new laptop or tablet? If you use it for work, you can probably persuade your accountant (and the IRS) that the costs should be deducted from your taxable income. Likewise, for internet bills, phone service charges and the like… with the caveat that you need to be able to document that it was for business purposes. Printer toner, computer paper, pens, and the like; keep those receipts.
It’s hard to get ahead if 50% of your income is going to taxes (which it probably is, if you add up everything you pay in sales tax, property tax, federal income tax, state income tax, local income tax and FICA taxes). But by being savvier with your documentation and deductions, landlords and real estate investors can pay less in taxes than other people, and truly realize the advantages of entrepreneurship.
Pass this rental property deductions checklist on to other landlords, to make sure they’re taking advantage of all tax deductions available for landlords!
How aggressive do you get with your travel deductions and home office deduction? Do you leave your mortgages in place just for the interest deduction? Spill the beans!