There are two types of landlords — those who pay too much in taxes because they didn’t know about deductions and those who pay penalties for deducting things they shouldn’t. If you’re a landlord who wants to get your taxes just right, check out these tax deductions for landlords.
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This post is provided for general information only. Please confirm the details and circumstances of your unique situation with your tax accountant or other appropriate advisor before taking action.
1. Bad Debt Expense
Many landlords have been asking about an unpaid rent tax deduction. There is no direct deduction if your tenant stops paying rent.
If you use the accrual method of accounting, you can write off unpaid rent as a bad debt expense. Since you claim your rental income as it’s due, the bad debt expense reverses the income you never received, so you don’t pay taxes on it.
If you use the cash method of accounting, you don’t need to take a deduction because you never reported rental income you didn’t receive.
2. Mortgage Interest
Mortgage interest is one of the largest expenses for most landlords. That makes sense since your mortgage payments often make up the bulk of what you charge in rent.
Most landlords can deduct their mortgage expenses in full. Unlike the personal mortgage interest deduction, there is no cap on the mortgage amount. If you have a very high net worth or income, consult with your tax advisor as there are planning moves you need to make to deduct all of your mortgage interest.
3. Property Taxes
Property taxes are also generally tax-deductible as a business expense for landlords. Similar to mortgage interest, there is no cap on the property tax deduction for landlords as there is for the personal property tax deduction.
4. Operating Expenses
Most landlords have routine operating expenses like a subscription to a rent collection service, property management fees, lawn care services, and other ongoing expenses. The expenses might be to maintain your property or to make it easier to manage your business.
As a general rule, all of these operating expenses are deductible.
When you buy a new rental property, you can’t write off the cost you paid for it. Instead, you have to take a depreciation expense over time.
The depreciation period is 27.5 years for residential rental properties and 39 years for commercial rental properties. You can only depreciate the value of the building.
Let’s say you bought a commercial rental property for $500,000. The land is worth $110,000, and the building is worth $390,000. You would divide the value of the building by 39 years. Your depreciation deduction is $10,000 per year.
Depreciation also applies to large expenses like installing a new air conditioner or replacing your roof. The IRS has rules for the depreciation timelines for different items. The rules usually match the expected lifespan of the item.
If something breaks, you can deduct the cost to fix it. For example, if the AC goes out in your rental property, you can deduct what the HVAC company charges you to fix it.
If you do repairs yourself, you can only deduct the cost of parts. You can’t take a deduction for your time or labor.
If a repair for a major item turns into a replacement, you can deduct the service call and repair attempts. If the costs for the replacement item and installation are high enough, you’ll usually need to depreciate them over time.
7. Travel Expenses
There are two types of travel expenses landlords can take.
- If you own a property outside of your home area, you can deduct the cost of traveling there to manage your property. For example, say you moved to a new state and rented out your old house. You need to travel to it to do work in between tenants. You can deduct the costs of that business trip.
- You can also deduct trips inside of your local area when you’re driving between your rental properties, between your rental property and your business location, or between your rental property and shopping trips for your rental property. You generally can’t deduct trips starting or ending at your house since those are considered your commute.
If you have car expenses, read up on the standard mileage deduction to learn how to claim them.
8. Legal Fees
You might need to hire a lawyer to draft a lease or evict a tenant. While personal legal fees are usually not deductible, legal fees related to your real estate business are generally deductible as business expenses.
If you pay a rental listing service or buy an ad in a newspaper, those are generally deductible marketing expenses. You can deduct the cost of all of your ads, not just the service that found you your new tenant.
Insurance is another important business expense that can be considered an operating expense. It deserves special mention because you need to ensure you have the right insurance. Landlords will generally need a landlord’s or business policy rather than a standard home insurance policy.