There are many reasons for owning a rental property: extra income, investment security, high return on investment, and great tax benefits. Sure, you might have to fill out some extra paperwork come tax season, but you might find that the tax benefits of owning a rental property outweigh the pesky paper pushing.
Many landlords worry that they will have to owe a ton of taxes on their rental income, but they are usually relieved to find that they don’t actually have taxable rental income! The reason for this is because there are a plethora of deductions that you can make on your taxes as a rental property owner.
What Can You Deduct from Your Taxes as a Landlord?
Knowing all of the deductions that you can claim on your taxes is very important as a landlord. More than likely, you will have accrued a substantial amount of rental income throughout the course of the year and if you don’t know how to properly make deductions, you may end up overpaying in taxes.
Here are the biggest tax deductions that you can make as a landlord:
This is usually the #1 largest tax deduction that rental property owners can claim. The interest that you are able to claim on your taxes comes from mortgage interest and/or interest on credit cards payments that are used for expenses around the rental property – repairs, upgrades, etc.
If something breaks at your rental property, whether it is the fault of your tenant or not, you can deduct the cost to repair it come your taxes. The only catch is that the repair is considered to be routine, necessary, and reasonably priced. Common deductible repairs on rental properties include windows and doors, leaks, repainting, gutters, and floors.
3. Personal Property
If you allow your tenants to use any of your personal property, you can deduct the value of that property from your taxes, up to $2,000. Examples of personal property might be appliances, landscaping equipment, furniture, etc.
There are many reasons for traveling as a landlord. For example, you will likely be traveling to and from your rental property to deal with tenant issues, perform routine maintenance, conduct repairs, and collect rent. All of this traveling adds up, both on your bank account and your vehicle, so you can deduct the cost from your taxes.
There are a couple of different ways to deduct travel expenses from your taxes as a landlord:
- Use the IRS standard mileage rate – the rules can be found in chapter 5 of Publication 463, Travel, Entertainment, Gift, and Car Expense
- Keep track of the individual expenses for fuel and maintenance
Keep in mind that you can also deduct airfare and overnight expenses, but only if they are absolutely necessary.
5. Office Space
Some landlords will have an office space where they keep all of their records and conduct regular business. Landlords can deduct the cost of their office space from rental fees to equipment; furniture to maintenance. Whatever the cost of running your office is as a landlord, you can deduct it from your taxes.
6. Employees and Independent Contractors
Although some landlords are a one-person show, others will opt to hire a couple of extra hands to get the job done. If you have an employee on payroll (property manager) or hire an independent contractor to, say, keep up with the landscaping, you can deduct their wages from your taxes at the end of the year.
If you have insurance on anything connected to your rental property, you can deduct the cost. This includes fire, theft, flood, landlord liability, and the insurance that you pay for employees if you have them (health, workers’ compensation, etc.).
Deducting Real Estate Depreciation from Your Taxes
There’s another kind of tax deduction rental property owners are eligible for that just gets better over time. Real estate depreciation is, essentially, a deduction that comes from simply purchasing a rental property – nothing else needs to be spent in order for a rental property owner to be eligible for this deduction.
Real estate depreciation exists because the IRS (incorrectly) assumes that the value of a property will decrease over time, due to wear and tear. The IRS assesses this perceived depreciation and allows rental property owners a tax deduction based on their calculation.
Real estate depreciation is calculated as such:
- First, the IRS considers the purchase price of the property
- They divide the purchase price by 27.5 – the number of years that the IRS deems a dwelling viable – to get your annual depreciation value
- Multiply your annual depreciation value by your marginal tax rate to get the amount that you can deduct from your property taxes.
Tax Deduction DON’Ts as A Landlord
Taxes are a finicky thing and there are certain things that you cannot claim as well as things that will disqualify you from all tax deductions.
- Renting to friends or family – Renting out property to your friends or family puts you at risk of invalidating your tax deductions.
- Unjustifiable costs – You cannot make claims on your taxes that you can’t justify with records. Good record keeping of your expenses is the key to maximizing your deductions.
- Inaccurate reporting – If your taxes seem overly complicated, or you have more than one rental property, you may want to consider hiring a professional. Incorrectly filling out forms or making a mistake in the filing process could have devastating effects on you and your business.
- Entertainment expenses – As of 2018, landlords can no longer deduct the cost of entertaining their tenants. This means no sporting events, resort trips, concerts, or anything else that would be considered “entertainment.”
If all of this information sounds like a lot to handle, you aren’t alone in your thinking. Owning a rental property is a huge responsibility and it’s difficult to go at it without any help – especially if you have multiple tenants or rental properties.
Take some of the pressure off of yourself by hiring the experienced and professional Maryland rental management team, Moon Ridge Property Management. If you have any questions about what working with a property management team looks like, contact us, today!