It’s tax season! Nothing is more exciting for rental property owners. Why? Because we are reminded of how amazing rental properties write offs are for tax benefits. They’re way better than just about any other taxable investment asset. Okay, maybe it’s just us nerds that actually get excited about it.
Dreading tax season?
Not sure how to maximize deductions for your real estate business? In The Book on Tax Strategies for the Savvy Real Estate Investor, CPAs Amanda Han and Matthew MacFarland share the practical information you need to not only do your taxes this year—but to also prepare an ongoing strategy that will make your next tax season that much easier.
Why do rental properties offer amazing tax benefits?
Rental property income is considered “passive income” by the IRS. Passive income is treated much more favorably than active income (“active income” includes things like W2 income and income from flipping properties).
Residential rental property is the only investment asset that both appreciates and depreciates at the same time. Both put money in your pocket! Everyone is familiar with appreciation—the value goes up on your property, and that increase in value is money you can keep.
Depreciation is a little trickier, but in short, the IRS assumes there will be continued wear and tear on your rental property throughout its life, and they offer you a level of compensation for that wear and tear in the form of pretty substantial write-offs. This isn’t literal wear and tear—if you keep the property pristine, that doesn’t count against you. The details on the write-off are tricky, but just know that you end up writing off that amount for depreciation on your taxes, which in turn increases your return.
Now it’s time for a list of things related to a rental property that can typically be written off on your taxes. The reason write offs are important is that they decrease your taxable income on the properties. The more write-offs you have, the less you have to pay in taxes.
The purpose of this list is not only to help ensure you include everything you can in your rental property write-offs, but also to alert you to how many write-offs there really are for residential rental properties in case you are shopping for investments and not completely convinced yet of how great the tax benefits on rental properties are.
20 possible rental real estate write-offs
1. Mortgage interest
For example, if a landlord purchases a property for $330,000 with a $265,000 loan, and the assumed estimated interest amounts to around $17,000 for the first loan year, they would be eligible for a $17,000 deduction from their rental income for that year. If their income amounts to $37,000 and they can deduct $17,000, they would only be taxed on $20,000, which makes a big financial difference.
2. Property taxes
A landlord can deduct state, local, or foreign property tax from their federal income taxes. However, the 2018 Tax Cuts and Jobs Act (TCJA) put a cap of $10,000 or $5,000 if married filing separately on this deduction.
3. Operating expenses
These deductions are comprised of the ongoing expenses of running a rental property. Here are a few examples:
- Water and sewer
- Garbage collection
- Property management
- Pool service
How cool is it that you can deduct an expense you haven’t actually spent any money on? The IRS lets you depreciate the value of your rental structure over the course of 27.5 years. You take the estimated worth of your rental structure (land not included) and divide it by 27.5, which gives you the amount for your annual depreciation deduction.
However, you need to know that if you sell the property for profit price, you may be responsible for all or some of the money written off for depreciation.
Landlords may claim repairs as a tax deduction. These are categorized as fixes made to a property to make it habitable.
Improvements, however, are not included in “repairs.” Anything that adds value to a property or extends its life is considered an “improvement.” These would be fall under “capital expenses,” which must be capitalized as a long-term asset and depreciated over many years.
6. Ordinary expenses
The IRS dictates that these expenses are “those that are common and generally accepted” within an industry. For example, a landlord could deduct the payment made to a contractor who had to replace a leaking roof.
7. Necessary expenses
The IRS mentions anything “deemed appropriate” or helpful can be deducted by a landlord. For example, the purchase of online education tools or business management tools would be included. Here’s a short list of some additional items deemed “necessary.”
- Interest. Deduct credit card interest, unsecured loans for improvement interest, mortgage loan interest, and any fees incurred from a bank during the loan process.
- Advertising. Marketing expenses used to keep or generate tenants/customers.
- Maintenance and repairs. Activities such as mowing and fixing rental properties to maintain habitation standards.
- Utilities. If a tenant reimburses you for utilities, you have to claim it on your income.
- Insurance premiums. Deduct the cost of employee health and workers’ compensation insurance, homeowner’s insurance, and losses from natural disasters.
8. Office space
These deductions not only include the home office space but also workshops and office expenses.
9. Property management
Company fees are considered an administrative expense and can be fully written off.
10. Professional and legal fees
Evictions are expensive, but a landlord can deduct court fees and legal fees in these situations. Additionally, any professional fees or services such as accounting, real estate agent, attorney, and bookkeeping can be deducted.
Side note: Remember that legally you are required to pay taxes on the rent garnered from your tenants.
11. Homeowner’s association (HOA) fees
If your rental properties belong to a homeowner’s association, then you are responsible for paying dues. Since they fall under the category of “necessary expenses,” you are allowed to deduct them against your rental income.
12. Pest control
As a landlord, you are responsible for maintaining habitable conditions for your rental properties. Fortunately, you can deduct any expenses for pest control since it falls under necessary expenses.
In order to legally operate, small business professionals are required to pay for numerous licenses and permits. The good news is these can be expensed on your income tax.
It may seem small and meticulous, but the little things add up. As a landlord, if you send notification letters, maintenance letters, or checks sent to tenants by way of USPS certified mail, the postage, envelopes, and letter supplies are tax-deductible.
15. Travel and vehicle expenses
There are two ways to approach vehicle/travel deductions.
- Keep track of your mileage when using your vehicle for business. Take the number of miles you drive and multiply it by the IRS-approved mileage rate. In 2021, the standard mileage rate is 56 cents per mile.
- You can deduct your actual expenses such as gas, repairs, and upkeep if you drive your vehicle for rental property purposes.
Expenses accrued from renting or buying equipment or tools can be deducted from your income tax. Some examples include:
- A new HVAC system
- Major appliances such as refrigerator, stove, washer, and dryer
- Light bulbs
- Smoke detector batteries
- Maintenance tools
- Plumbing upgrades
- Kitchen upgrades
If you pay the utilities of your rental units, you are allowed to deduct this expense from your taxes. Some examples of utilities include:
- Cable TV
- Trash collection
18. Costs incurred while searching for a new business property
Any expenses incurred during the process of looking for a new rental property can be fully written off. In order to qualify for these deductions, however, you must spend at least half the time you are away on business, and the primary reason for travel has to be because of your business.
Technically this means you could write off a long weekend in California or Florida as long as the majority of your trip is spent working on business-related tasks.
Several items you could write off include:
- Car rental
- Hotel expenses
- Other travel expenses
19. Memberships and subscriptions
Just as you can write off tangible tools, don’t forget that the intangible ones also count for tax deductions. If it serves the purpose of helping your business, your employees, and your customers, you can write it off.
Here is a list of several of these tools to keep in mind:
- Cloud accounting tools
- Social media management tools
- Stock photos
- Dues from any professional organizations you are part of
- Purchases or monthly/annual subscriptions to software, apps, and other online tools used to run your business
- Subscriptions to trade magazines (general or “waiting room” magazines not included)
20. Pass-through tax deduction
The 2018 Tax Cuts and Jobs Act (TCJA) established a special income tax deduction (not a rental deduction) for landlords. Rental property owners may qualify for one of two options, depending on their income.
- Deduction of up to 20% of their net rental income
- Deduction of 2.5% of the initial cost of their rental properties in addition to 25% of payments made to employees
Now that we have discussed 20 awesome rental property write-offs, let’s look at how to claim these deductions on your income tax.
How to claim property tax deductions
You must keep detailed records of all expenses and income related to your rental properties and business as they occur. This makes the process of filing taxes at the end of the year much more manageable.
To file rental property tax deductions the same year you put money out, you must file with the IRS Schedule E form.
Hang on to your records in case you are ever audited by the IRS. You will need to have itemized proof for each deduction you claim.
Things start getting tricky if you ever use the rental property as a personal residence. The IRS has certain rules about how long you can live on the property and what you can or can’t deduct. If you do choose to live at your rental property, you would need to file the IRS Schedule A form.
One last thought on rental property write-offs
If you own rental properties, I guarantee you are missing out if you aren’t working with an investor-friendly accountant who works with real estate investors on a regular basis.
One of the biggest financial perks of rental properties is the tax benefits, and unless you are an accountant yourself, you are absolutely missing out on some of the write-offs you could be taking.
The laws also change often regarding what you can and can’t do, so you need someone who follows those exactly in order to maximize your write-off potential. Always hire a tax professional with real estate investing experience—that way, you’re sure you’re always enjoying the most deductions.