Understanding Tax Benefits for Landlords
Updated: Apr 22
Owning a rental property comes with a range of responsibilities, including tax obligations. Generating income and increasing owner equity aren’t the only ways investors hope to profit by owning a rental. Investing in property also provides numerous tax benefits compared to many other income-producing assets, and understanding them helps you to maximize your profits.
In today’s post, we’ll review some of the tax gains a landlord can benefit from.
Deductible rental expenses
As a rental property owner, you can deduct various expenses related to buying, operating, and maintaining the property. Here's a rundown of the most common deductions.
Mortgage interest deduction
Expenses to obtain a mortgage, such as commissions and appraisal fees, are not deductible when you pay them. Instead, these costs are added to your basis in the property. For investment properties, you can deduct mortgage interest as a business expense.
Repairs and maintenance
A repair keeps your rental property in good condition and is a deductible yearly expense when you pay for it. Repairs include painting, fixing a broken toilet, replacing a faulty light switch, etc. From a tax standpoint, you should make repairs as problems arise instead of waiting until they multiply and require renovations.
Property tax is a tax paid on property owned by an individual or a legal entity, such as a corporation, and they are an ongoing expense for rental property owners. It is calculated by the local government where the estate is located and paid by the owner. It’s also usually based on its value. Depending on your level of participation in the property, you may be able to deduct the full amount as a business expense.
Other common expenses
In addition to mortgage interest, repairs, and property taxes, some other common expenses you can deduct include advertising, employees, and legal fees.
Many expenses can’t be deducted right away, but instead, these big amounts can be deducted over time through a process called depreciation. According to these Redmond property managers this is one of the biggest deductions for rental property owners because it reduces taxable income without impacting the actual cash flow for your real estate. The IRS allows real estate investors to depreciate the rental property over a period of 27.5 years to recover the cost of wear and tear. Because land does not wear out, only the cost of the home plus other items that increase the cost basis, such as a new roof, appliances, or carpeting, may be depreciated.
One of the ways to increase your depreciation deduction is by utilizing cost segregation studies and allocating as much of the property’s purchase to the building as possible to maximize your depreciation expenses.
Travel and mileage
Property owners who make routine trips to check on their tenants aren’t inconveniencing themselves, even if they have to go the distance to get to their properties. Fortunately, the landlord's travel expenses for driving to and from your rental properties for business affairs are deductible, and these can include (parking fees, gas, rental cars, or even plane tickets). Furthermore, if you are traveling overnight due to business needs, the hotel costs and meals, plus other related expenses, will be deducted as well as long as you make sure to keep track of them and be attentive when it comes to documenting these costs.
Provided they meet certain minimal requirements, landlords may deduct their home office expenses from their taxable income. Acording to this Chicago property management company this applies not only to space devoted to office work but also to a workshop or any other home workspace you use for your rental business. This deduction allows you to deduct a portion of your home's expenses, such as rent, utilities, and repairs, based on the percentage of your home that you use for business purposes.
However, make sure you follow strict IRS guidelines to qualify for this deduction, like using the space exclusively for business purposes and meeting clients or customers there on a regular basis. Also, you can consult with a tax professional, as it’s highly recommended to ensure you meet all the criteria and take full advantage of this benefit.
You can deduct the premiums you pay for almost any insurance for your rental activity, including losses from casualties such as fire, flood, earthquake, hurricane, and theft insurance for rental property, as well as landlord liability insurance. In addition, if you have employees, you can also deduct the cost of their health and workers' compensation insurance.
A variety of tax benefits come with owning a rental property, and by following these listed above, you can significantly reduce your tax liability and increase your profit while minimizing costs.
A property manager is an amazing aid when it comes to taking full advantage of these benefits, as they can help you carefully follow IRS laws and regulations in an effective way. They are professionals with a lot of knowledge in this area of expertise and can easily navigate the taxes, helping you boost your property’s financial performance.
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