Owning and managing a rental property can be an extremely profitable business. Landlords can use the rent from tenants to pay off their mortgages, as well as handle other costs related to managing properties.
However, despite how lucrative the business can be, millions of landlords pay more taxes on their rental income than necessary because they fail to utilize the tax deductions available to rental property owners. So to help save landlords money, here’s a handy list of tax tips for landlords so they can reap the benefits from real estate and won’t have to break the bank come tax season.
Writing off repairs and improvements
Maintaining rental properties is crucial for landlords, and thankfully any repairs or improvements you make on your properties can be written off as tax deductions. Repainting, fixing gutters, replacing broken windows, installing new floors, fixing leaks, plastering, and supplying new furnishings or decor can all qualify as tax deductions.
However, the IRS differentiates repairs from improvements, as improvements are seen as adding value to a property. Any repairs made need to be classified as work meant to keep your property in “good working condition,” as opposed to work meant to increase the value of said property.
Additionally, if you spread out repairs, you can easily save on income taxes without crossing the maximum threshold for allowable tax deductions set by federal and state governments.
Interest is one of the biggest and most common deductions for landlords. Landlords can deduct interest on a number of expenses including mortgage interest payments on loans (for either purchasing or improving your rental properties), interest on credit cards for services or supplies used for your property business, and interest on car loan payments when the car is used for rental activity.
Keep thorough records and monitor tenant expenses
Keeping detailed records of your expenses is essential as a business owner, especially when it comes to tax deductions. If you want to claim something on your taxes, you need to have proof in case you are audited, so always make certain you are accurate and thorough.
You should also be sure to monitor tenant expenses. If a tenant pays for services or repairs related to the property and then deducts it from the rent, the landlord needs to understand what to mark as rental income. For instance, if a renter pays for an improvement that the landlord is responsible for, then you must claim the full amount of rent paid as well as the amount your tenant paid for the given service or repair.
But keeping track of all of your tenants could become overwhelming for some, so websites like turbotenant.com offer software and resources to help smoothly manage your residents. And in addition to having detailed records, make sure you’ve got the right documentation for tax purposes including tax form envelopes.
Just like other self-employed individuals, landlords can write off any local or long distance travel related to their work as a business expense. In this case, “travel” doesn’t include the distance you commute from your home to office everyday.
But it does mean the travel you do when going to a rental property to handle a tenant complaint or show a unit to prospective tenants. It can even just stopping by the hardware store to pick up a tool for a repair. When deducting vehicle expenses, you can either deduct the expenses you incur like gasoline, maintenance, or repairs, or you can deduct the standard mileage rate.
You can also deduct any overnight travel expenses like airfare or hotels. However, be careful with overnight travel as the IRS tends to flag these deductions. So if you take a long distance trip for your rental business, make sure you have the proper documentation to back it up.