Tax on Rental Income and Applicable Deductions for Landlords
The best part of being a landlord is that you can enjoy the maximum benefits of tax deductions on your rental income. Most landlords however fail to harness the complete benefits of tax allowable expenses on income and end up paying more in taxes. This means you are unnecessarily losing out on profits and affecting your business. So, it becomes important you understand the tax on rental income and know about the deductions allowed in the landlord business.
As a landlord, you are bound to pay tax on rental income. If you own real estate and you are having rental income from that property. Then, you are required to report all of that income during the financial year in the tax filings. The Tax on rental income is calculated by deducting the expenses that occurred in your business. These expenses must be legit and should fall under the applicable deductions for a landlord business.
What Expenses are Tax Deductible For Landlords?
1. Startup Fees
If you are just starting your landlord business, you can take deductions on expenses even before you actually earn profits. You can deduct expenses incurred in starting up your landlord business. These can include the amount spent in researching the potential markets, fees spent on advertising to find the right deals, and exploration costs. You can also deduct costs incurred in availing legal and financial services for setting up your business.
Read: Why you should incorporate your Rental Business?
2. Home Office
As a landlord, you qualify for taking deductions on using a dedicated home office space for carrying your rental business. If you are using 30% space of your home for an office, you can deduct 30% of your home bills. These can include bills of utilities, repairs, rents, home insurance, and interest on home mortgages. You can deduct only the portion of these bills and not the complete bill as you are using just a part of your home.
3. Legal and Professional Service Fees
You can take deductions on the fees you pay to attorneys, and professionals like accountants, real estate advisers. Service charges paid to appraisers, bookkeepers, analysts, and consultants also comes under this deduction. However, these deductions are applicable only to the services you availed for your rental business into consideration.
4. Advertising Expenses
The advertising expense is a deductible business expense and can be deducted from your rental income. You can include costs incurred in promoting your business online and offline. The costs occurred in listing your business on any social or classifieds website. And, costs that occur putting your rental listing in a local newspaper or on the billboard can be deducted under advertising expenses.
5. Landlord Forms
Landlording without legal forms is a sinking ship. And if you aren’t sailing a sinking ship, you must be using various legal forms ranging from rental lease to eviction notices. You can`t deduct the cost of these forms from your rental income.
Use the Rocket Lawyer Document Library to scroll through all the legal forms, a landlord require for a business.
You can take deductions on the premium you pay for insuring your rental business. The deductions can be taken on all kinds of insurance you are paying a premium for. These can include insurances like landlord liability insurance, Landlord insurance (covered from Perils), and Rent Guarantee Insurance.
Read: What covers should you include in the Landlord Insurance?
7. Mortgage payments
Most landlords have a mortgage tied to their property. So, if you have a mortgage you can deduct the amount of interest paid on it. Generally, these mortgage payments can include loan origination fees, interest paid on secured loans, unsecured loans, and credit card payments. However, it is provided you utilize the loan amount for the property in consideration and not for personal use.
Do you know, you can also deduct the premium that you pay on your mortgage insurance.
The utilities that are paid for a business are deductible business expenses. You can deduct the expenses paid for utilities like gas, electricity, water, sewer, and heat. The telephone bills and internet bills also come under utilities and hence you can also write these expenses under deductions.
If you own or lease a vehicle to travel to your rental business, you can report expenses that occurred in traveling. There are two ways you can report these expenses. Either you document the exact cost that occurred for this travel or can take the standard mileage deduction. The standard mileage deduction rates change every year and you must verify it before you take the deduction.
10. Travel Expenses
The travel expenses which are occurred for your rental business are a deductible business expense. These travels should be overnight and out of your city limits to include in deductible expenses. You can include airfare charges, taxi charges, hotel stays, and food bills in deductible travel expenses. However, you should document everything carefully as the authorities closely scrutinize the travel deductions.
You can deduct the cost of repairs incurred in your rental property. The routine repairs can include day to day works of plumbing, heat, and electricity on your property. You can deduct the cost of these repairs completely from your taxable income. However, different rules apply if the repairs are for purpose of improvement and adaption of something on the property.
12. Tenant Costs
The costs associated with screening the prospects are also tax-deductible. You can take tax benefits by deducting the costs, you paid for towards the tenant`s background check, obtaining their credit reports and eviction reports.
Read: How to do Tenant Background Verification like a Pro?
The maintenance costs are also deductible business expenses. The maintenance works can include patching and painting work, sewer cleaning, interior and exterior cleaning of your rental property. You can take deductions on the expense incurred for these maintenance works.
The only thing here is that the maintenance works that fall under capital expenses are not straight away deductible but are deductible through depreciation.
Read: What Maintainenace Repairs are Landlord’s Responsibility?
Owning rental real estate, you can take benefits of depreciation and can deduct depreciation value from your rental income. You can take depreciation on the complete value of your rental property and the value of its assets. However, you need to divide the complete depreciation among several years, and is not available immediately. You can divide the value of your building and assets over 27.5 years and depreciate accordingly every year.
Read: Investors blueprint to calculate Rental Property Depreciation
15. Rental property taxes
You can take a deduction on the property taxes you pay every year to the government. These taxes can include state and local taxes which are collected from the homeowner for the welfare of society.
16. Employee Salaries and Independent Contractor Wages
You can deduct the salaries and payments you pay to employees in form of commissions, wages, and bonuses. These can be employees who are permanent like the property manager or an independent contractor like the maintenance guy. The salaries or wages paid to them falls under business expense and hence are allowed for deductions.
Read: Should you hire a Rental manager or rent through a Property Management Company?
17. Gifts to tenants
The costs of gifts that occurred while gifting your tenants are allowed for deductions. The costs of gifts come under the business expense and you can easily include them under deductions. However, the cost of gifts per tenant can`t exceed $25 each per year.
Read: How to build a good landlord-tenant relationship?
18. Theft and Casualty Losses
You can take deductions on the losses on your rental property due to casualties and theft. These deductions are available on the uninsured amount of the losses. You may have landlord insurance but sometimes that is not always able to fully cover the cost of damages. In this case, you can take a deduction on the uninsured amount.
19. Rental Losses
Some landlords who actively participate in their rental business or qualify as real estate professionals can take deductions on rental losses on their property. The rental losses occur when the operating expenses exceed the income from your rental property in a year. The losses are not good but you can take deductions of up to $25,000. Provided, your gross annual income doesn`t exceed $100,000.
20. Unpaid rent
If you are using accrual-based accounting for your rental business, you can claim a deduction on the unpaid rent. This means the rental owner who has reported revenues and expenses on the taxes but hasn’t actually occurred to it can take deductions on them under the bad debt.
Read: How to Collect Rent Arrears From a Tenant?
21. Passive Activity Loss
As a rental property owner, the IRS allows you to deduct passive activity losses from your income. Supposedly if you have collected $20,000 annually in form of rent and have expenses worth $25,000. Then you have a loss of $5000. Now you can use this loss to offset gains from other passive income. Or, if you have a net loss and no profits in this financial year, then you can carry forward this loss to offset the future year`s passive activity income.
The maximum loss from Passive activity is capped to $250,000 for a single filer and $500,000 for a joint filer. Excess of these caps is carried forward for the future.
The Pro Landlord Bonus Tip:
Always keep proper documentation and evidence to back up your claims for tax deductions. You can use a separate expense logbook to record all the expenses that occurred in your business with details. It can help you avoid scrutiny if ever occurs due to an error.
Also, being a landlord you should incorporate your rental business under LLC today as it can give you the benefits of a pass-through taxation system. You can save yourself from hefty tax rates.
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