TAX DEDUCTIONS THAT LANDLORDS CAN’T AFFORD TO MISS

It’s easy for landlords to lose a lot of hard-earned cash when it comes to running their rental property. One thing that’s very easy to forget in particular is tax deductions. Real estate and rental properties to be more specific, isn’t shy of any tax benefits; in fact, the same also applies to other real estate investments. These tax benefits offer a fine line in the amount of profitability. To maximize profits through tax deductions, let’s take a look at the common tax deductions a landlord can use to his advantage.

INTEREST

This has to be a landlord’s biggest deductible expense. There is almost always some type of interest involved when it comes to real estate whether it’s the mortgage, refinancing loans, or even on credit cards used to pay for repairs and renovations. Any interest paid on any type of financing used on the property may have a tax deduction which should be discussed with a tax advisor.

The Tax Cuts and Jobs Act of 2018 limited the deduction for landlords who earn more than $25 million from their rentals. In other words, the deduction only applies to those who earn less than $25 million. For those who exceed the limit, they can take advantage of deductions as long as they agree to depreciate their rental property over 30 years instead of 27.5 years.

DEPRECIATION

It’s impossible to claim a deduction for the full price all at once. However, this can be refunded back slowly through depreciation. Rental properties depreciate over 27.5 years. Each year, a small percentage is deducted (1 out of 27 every year to be exact). There are numerous ways to come up with the depreciation percentage but the main point of it is getting back the amount paid for the rental investment. Bonus depreciation allows individuals and businesses to immediately deduct a certain amount of the total all in (purchase + renovation) cost in the first year, which can be a strategic advantage for real estate investors by conducting a cost segregation study.

REPAIRS

As long as repairs are conducted in order to maintain the property in its normal and functional state, the cost of repairs is fully deductible in the year in which they are incurred. Fixing broken heating and cooling systems, broken windows, repainting, or fixing gutters or floors are counted as reasonable repairs. However, capital improvements/ renovations are not deductible, however, these improvements can be used to justify an increase in the rental rate.

PASS-THROUGH TAX DEDUCTION

Enacted in 2018 where landlords will qualify for a new pass-through tax deduction by the Tax Cuts and Jobs Act. Based on their income, landlords will be able to deduct up to 20% of their rental income or 2.5% of the initial cost of their rental property plus 25% of the amount needed to pay any of their employees. This pass-through tax deduction is set to expire after 2025.

TRAVEL

Any expenses used to travel to the rental property, answer tenant requests, or meet hired contractors are tax-deductible. The same also applies to any travel expense used for a trip to the store to purchase repair supplies. However, travel made to renovate or improve the property is NOT deductible. 

Vehicle expenses are deducted in either of two ways: Deduct your actual expenses (gas, upkeep, repairs) or use the standard mileage rate based on IRS standards. Before attempting to claim any of these deductions, make sure to have records or official receipts of your travel expenses, and consult your tax professional.

HOME OFFICE

If you happen to conduct business in a home office or workplace within the property, you can deduct home office expenses on your taxes. Provided that minimum requirements are met (such as the office space should be used to manage the rental business) tax deductions can be made. 

INDEPENDENT CONTRACTORS

Whenever you hire professionals or contractors to perform services for your rental property, their wages can be deducted as a business expense. This is true whether you work with a property manager or an independent contractor such as a carpenter or repair person.

INSURANCE

Almost any insurance premiums for your rental property can be deducted as well. This includes fire, theft, flood, and even landlord liability insurance. If you happen to have employees working with you, you can deduct the cost of their health and workers’ compensation insurance. Working in a home office also allows you to deduct a portion of your homeowners’ insurance as well. 

The responsibility to pay any taxes is just as important as knowing whether you’re eligible for any deductions to help minimize the amount owed. To ensure that you make the most out of your money, have complete financial records to guarantee all of your deductible expenses are reported and refunded.

To be fair, tax deductions are a bit complex and it could be stressful especially for first-time landlords and property managers alike. In order to keep track of any and all of your rental property taxes, it would be in your best interest to partner with professionals who have years of experience in the field. So if you’re only looking to settle with the best, ProWay Property Management would be the right fit for you since our team of professionals has a broad knowledge of Detroit property management and investment properties. To learn more about our services, contact us at (734) 744-5080 or reach out to us via email at [email protected].