Not sure which rental property tax deductions you can take as a landlord?
Deni and Brian run through a quick overview of over 20 landlord tax deductions. Not legal or tax advice, just a primer for the questions you should ask your accountant 🙂
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Deni: Hi, everyone, and welcome to Spark Rental Facebook Live podcast. Sorry, I’m out of it here today, it has been one of those days.
Brian: Next season and that is a favorite time of year,
Deni: Anyway, last time Brian and I spoke about how to get a loan for an LLC owned company. Last week I had a Big Tech issue, so we kind of missed last week, and I think that’s the first time we’ve missed, and I don’t know how long.
Brian: Well, you know, it was vacation. I was on vacation traveling. You were on an emotional vacation.
Deni: Yes. This week, we’re going to be, you know, it’s that time of year, as Brian was just saying, and we’re going to be discussing rental property tax deductions. Just kind of an overview. I don’t know about you all, but this time of year definitely can stress me out a bit. So, any kind of little tips is helpful. So please let us know where you’re tuning in from. This is definitely interactive. Very relaxed. You know, throw in your questions, even if it doesn’t have to do with taxes. Let us know what your question is. And if you have any ideas for things, you would like us to discuss. Throw that in the chat, too. We welcome that. So, with that being said, Brian, start us off. Tell us some of these tax deductions.
Brian: Yeah, sure. So, we’re going to walk through over 20 tax deductions for landlords and real estate investors today. Obviously, we’re not going to go into a lot of detail about any one of these, but this is really more of a conversation starter for you and your accountant. So, let’s kick things off with the first one being losses from theft, casualty vandalism. You know, if someone damages your property, steal something from your property. You know, I’ve had all kinds of incidents like this over the years. I’ve had appliances stolen. I’ve had in some particularly bad cases; I’ve had air conditioning condensers ripped apart for the copper coiling inside.
Deni: I had a property where that happened.
Brian: Yeah. And you know, these are some of the extra risks that you take with lower-end properties that no one really a lot of people don’t think about before they buy them, right? All they see is the lower costs to get in the lower down payment, you know and all that stuff. But lower-end properties do come with extra risks of things like crime and theft and vandalism and all these sorts of things. So that’s the first one. You can write off those expenses. And by the way, these are all real expenses. You know, none of this is immoral or illegal. You know, these are real true expenses that you’re having, and you should not be paying taxes on anything but your profits, right? So, all right. So, repairs and maintenance, you know, can be a little bit blurry because capital expenditures have to be depreciated. You can’t deduct the cost of capital expenditures all in one year, and the line between what is a repair versus a capital expenditure can be a little blurry. You know, if a baseball goes through one of your windows, for example, and you replace that window, that is a repair. If you replace every window in the house because they’re outdated and you want to update them to improve your property, that’s a capital improvement and needs to be depreciated as opposed to deduct it in a single year. So, when in doubt, again, talk to an accountant and on along those lines. The third one here is property depreciation. So, the value of the building itself, you can depreciate over twenty-seven and a half years. And what that means is every year you can deduct one, twenty-seventh, and a half of.
Deni: Isn’t it great that the government throws in the half there just to confuse us a little more?
Brian: They just pick 27 or 28 years or 30 years or whatever. I mean, you know, just make it easy on her 25 years like, but whatever. So, for the first twenty-seven and a half years, do you want a property? You can deduct twenty-seven and a half of the cost of the building each year when you file your tax return. Now, one thing that I did not know initially as a real estate investor and I found out later on is that the government is going to charge you for depreciation recapture when you go to sell, whether or not you deduct for depreciation each year that you own the property. So, if you don’t take it, you’re still going to be paying those taxes anyway. So, some landlords have this nutty notion that they’re going to avoid paying depreciation recapture when they sell. If they don’t Deduct for depreciation each year, it’s bogus, you’re going to owe the taxes on it, whether you actually took the deduction or not. So always take the depreciation deduction every year for your properties.
Deni: And a good financial adviser should really tell you they should lead you this in this way properly. So, make sure that you do have somebody that knows real estate investing.
Brian: Absolutely. And unfortunately, a lot of accountants out there don’t really know much about investing properties, so make sure you work with someone like Deni said, who is familiar with landlord laws and, you know, rental property, depreciation and deductions. All right. Moving on to number four, segmented depreciation, which is different that is not depreciated over the full twenty-seven and a half years that is depreciated over shorter periods of time, depending on the type of depreciation. So, for example, if you replace the appliances within a rental property, those usually fall under personal property as opposed to part of the building itself. And capital improvements to the building. So those are you can depreciate them still, but they’re depreciated over a different time horizon landscaping costs. You know, those are usually depreciated over a shorter time horizon as well. So again, speak with an accountant about it. You know, we’re not going into, you know, granular detail with all these. Number five is utility costs. If you pay for utilities in your properties, that is deductible. Some landlords include utilities and within the rent, and they just charge higher rent. So, you know, or in some cases during a vacancy, you’re on the hook for utilities. So regardless, if you pay for utilities, their deductible home office as a real estate investor, you are self-employed.
Brian: You can take a Home Office deduction if you and this is on your personal tax return, not your Schedule E for your rental properties. So, keep that in mind. And the Home Office deduction only applies if you are itemizing your deductions rather than taking the standard deduction, which is unlike all of these other rental property deductions that take place entirely on Schedule E, you can still take the standard deduction with them. But if you take the home Office deduction on you for your personal tax return, you have to itemize for that. Real estate related travel is another expense you can deduct for. Be very careful with this one. And for that matter, be careful with the home Office deduction as well. Can be audit triggers. The IRS gets audit happy when they see people taking too many or too much for deductions for Home Office, for real estate related travel or business travel in general. You know, the eighth item on this list is meals. Same thing. It can be an audit trigger if you go overboard with it. So, you know, by all means deduct for these expenses if they are legitimate. But keep all of your receipts.
Deni: We do have a question how many meals do you write off per property on average, and you want to make sure that the meal that you’re having is directly correlated with property business? So, I don’t know if there’s a limit on meals, but I mean, if you’re taking two weeks of breakfast, lunch and dinners and throw in those receipts in that might, you know, be called into question.
Brian: Just be prepared to defend it to the IRS if they come knocking, you know, keep the receipt and prepare to provide the contact information for the person that you had the meal with.
Deni: Bubba says my research last year said Home Office hasn’t been a valid deduction for years
Brian: For people who are self-employed you can. Employees cannot take the home Office deduction anymore, but self-employed people can. But again, talk to your accountant. Either Deni or I are accountants, so. Grain of salt and all that.
Deni: But I have taken the home Office deduction, so it’s still there.
Brian: Yeah, self-employed people can take it. But again, you have to itemize for it. So, which may or may not be useful for you. So, it may or may not make sense for you. All right. Number nine is certain closing costs. Some closing costs can be deducted this year when you buy a property. Some have to be depreciated over time, so can speak with an accountant about that. But some closing costs are deductible entirely in this year. And even the ones that have to be depreciated over time, you can still take that as part of your depreciation deduction this year. And by the way, we have, if you are confused about depreciation and how that works. We have an article about that, and we have a free rental property depreciation calculator. We’ll include a link to that in the comments here.
Deni: There is a link already for the article, and I’ll throw the calculator in momentarily.
Brian: Well, the calculator is built into that article.
Deni: There we go. It’s in there.
Brian: All right. Number 10 is property management fees. Those can be deducted. It’s pretty straightforward. One number 11 rental property insurance and rent, default insurance. And actually, it’s a Deni. I meant I meant to include a link in here for where people can sign up for rent, default insurance. But so rental property insurance, you’re familiar with that. That’s pretty straightforward as well. You can deduct that expense rent, default insurance a lot of people are less familiar with if the tenant stops paying the rent. If they default on the rent, then you file a claim with your rent default insurance, and they make the monthly rent payments for you until you have replaced that tenant with a new paying tenant or until your old tenant catches up the rent. But either way, you keep collecting your rent payments regardless of whether you have a deadbeat tenant in there who stops paying the rent, and that is also deductible as an expense. So, I’m a big fan of rent default insurance. I have used it myself before. I have filed claims with it before. I found it much easier to file a claim and start collecting those rent payments for the insurance company. Then I expected it to be so anyway, worth checking out and I believe so I think it’s SparkRental.com/steady is the link for checking out.
Deni: I will be putting it in momentarily.
Brian: And it’s pretty affordable. I think you’re for the average rental property you’re looking at like four hundred bucks a year, four hundred fifty bucks a year and it’s a great sleep soundly at night kind of thing. You know, just having that, that reassurance that you’re not going to have problems with rent defaults is worth the peace of mind. All right. Moving on. Number 12 mortgage interest for your rental property loans. It’s also one that a lot of people are pretty familiar with, so we don’t need to spend a ton of time there, but you can deduct the interest you pay on your mortgages for your rental properties. Mortgage insurance is one that only really applies if your house hacking because rental property mortgages don’t charge mortgage insurance. So, but it’s still there as a possibility. Number 14 Accounting, legal and other professional fees. You know, if you hire an attorney, you hire an accountant. If you buy a state-specific lease agreement from us, from our software, you know that is also deductible when your taxes like, I just let slip that in there Deni.
Deni: I see how you did that, Brian. And the link for the rent or rent insurance and the leasing agreement is in the chat.
Brian: Awesome! Tenant screening fees. Those are also deductible as number 15. Now in our landlord software, the applicant actually pays the tenant screening fees directly. So, it’s a non-issue. But if you are paying your own tenant screening fees for credit reports, going to background checks, that sort of thing, those are deductible. Number 16 legal forms. I think we actually already mentioned lease agreements in here. But yeah, if you pay for legal forms like lease agreements or eviction notices, we offer eviction notices for free. But if you pay for any of those sorts of legal forms as landlord tax-deductible. Number 17, property taxes. Also very straightforward, you know, but you don’t have to pay taxes twice, right? Like you don’t have to pay income taxes on the money you spend on property taxes for your rental properties.
Deni: I just wanted to interject in there real quick to court fees are also tax-deductible. So, if you don’t use like an attorney and you’re going to file an eviction on your own, those court fees, you want to keep the receipts and everything because that’s deductible.
Brian: That is a great point. Yeah, it’s another great example of legal fees being tax-deductible. All right. Where were we? Oh, number 18 technology, gadgets, phones, tablets, computers and also the service for those you know your phone bill, your internet bill, those can be tax-deductible if you use them for business purposes as a landlord. So, talk to your accountant about that. Again, that can get a little gray if you use it 99 percent for personal stuff and only one percent for business stuff. The IRS would frown on you deducting those expenses, but if you truly use it for majority business, then they’re potentially deductible. Talk to your accountant about it. Number 19 Any rental property licensing or registration fees you have to pay to your local municipality or your state. Those are deductible, of course. Number 20 if you pay occupancy taxes on your rental properties, those are also tax-deductible, and then the business entity pass-through deduction is still a thing, although that’s getting hazier by the year, it seems like in the post-Trump era. So, you know, again, that’s something you want to talk to your accountant about.
Deni: Aneel, you had said thank you that this is very valuable info, and I am going to put a link in that will provide you pretty much everything we’ve just listed.
Brian: Yeah, we have. We have a much more detailed article that breaks down each of these different 21 expenses that you can deduct these deductions. So that’s better or that’s a place where you can have some more information about each. Again, in this podcast episode, we’re just trying to give you a quick rundown and to spur your thoughts really on this and to give you a little list of things you can talk to your accountant about. But none of this is tax advice or legal advice. It’s more just a starting point for what to bring up with your accountant.
Deni: All right.
Brian: Deni, any other thoughts before we wrap up this episode?
Deni: I don’t think so. I think we covered a good amount, and the links are in the chats for anybody that wants to learn a little bit more or check out the lease agreement or the rent insurance. So go ahead and check them out. And I think that’s it.
Brian: All right, well, as always, thank you guys so much for being with us and for your participation. Oh, by the way, we do have a question here from Elena. Elena asks, what about umbrella policy if you aren’t an LLC? So, I assume you mean like a liability policy and a liability insurance policy that yeah, even if you own your property under your personal name, if you buy, if you buy a liability insurance policy as a landlord for that property, that is a business expense associated with that property. Even though you aren’t actually incorporated as a business, it’s still a business expense for your investment property. So that should be covered again when in doubt, talk to an accountant about it. But yes, that should be deductible.
Deni: All right. Thank you, everyone, thank you for the questions. And we will be back next Tuesday and have a great rest of your week.
Brian: See you guys soon. Bye-bye.