December means the holiday bustle is upon us; there are flights to catch, gifts to purchase, houses to decorate, and taxes to think about. Not the most cheerful of messages to hear during this time, but for property owners or the self-employed, tax season can be as stressful if not more stressful than the holiday season.
To get a head start on taxes next year, here are a few things to consider.
The IRS allows taking tax deductions for any legitimate expense related to running a rental property. Rental owners can claim expenses spanning everything from interest to insurance, repairs, and depreciation. However, it would be best to record them according to IRS guidelines.
To help save time and money, we have compiled the top 10 taxes deduction
- Property Depreciation
Most Real Estate is considered an appreciating asset. Over time, with some caveats, owners can expect property values to increase. Sounds good, right? However, those who managed or owned rental properties know the truth. Properties fall apart all the time, especially with tenants living in them. Normal wear tear happens to every rental property; it is just the nature of the beast.
It is a good thing the IRS allows normal wear and tear in the form of depreciation. Regardless of any actual expenses spent on repairs and maintenance.
Determining the depreciation figure and keeping proper records over time is vital. All owners should have a good certified public account (CPA) or tax professional in their back pocket. Generally, owners can calculate the depreciation of a rental property with this simple equation known as straight-line depreciation:
To figure out the depreciation, first, subtract the land value from the combined value of the land and building. Then divide the building value by 27.5 years to get the yearly depreciation amount.
- $250,000 (Total Value) – $80,000 (Land Value) = $170,000
- $170,000/27.5 = $6,181.82 depreciation per year
$6,181.82 is the annual amount that can be deducted when filing rental property taxes. Each year, do this to assess the current home value and the associated annual depreciation.
2. Maintenance and Repairs
Let us face it; it is not if but when something will go wrong. That means spending money. Some repairs are minor, while others will make property owners question why they even got into this line of business.
The question is: what constitutes a repair in this context? The answer is that small actions are needed to help a property function properly. This includes the painting of walls, the caulking of bathtubs, the patching of drywall, and much, much more. However, this does not include large-scale measures such as significant improvements.
Improvements
Improvement deductions are a little different than repair deductions. Whereas repairs include caulking bathtubs and painting walls, improvements include replacing roofs, adding new rooms, overhauling kitchens, and the like.
Using the example of a roof, which is considered long-term capital improvements, will depreciate the life of the property, or 27.5 years, so as long as the entire roof is replaced.
3. Loan Interest Deduction
Most savvy investors will utilize leverage or a loan to purchase a cash-flowing rental property; this is great because now the tenants are paying the mortgage with each rental payment. That sounds like a sweet deal. It gets even better. While the tenants are paying down the mortgage, the IRS will allow owners to write off any interest paid during the year. Generally, this will be the most significant write-off when it comes to rental properties.
Owners can also deduct any interest paid while using a business credit card. Any extensive repairs or maintenance projects paid for while using a credit card can be deducted.
Interest payment figures can reach tens of thousands of dollars for some landlords. Unless a portfolio has earned more than $25 million from various properties, all of these interest payments can be deducted.
4. Professional Services
It kills me every time I see an owner slaving away trying to manage their owner investments (I am very biased). Why sit there and deal with tenant and maintenance headaches when an owner can let a professional property manager handle the day-to-day operations? There is good news there; the IRS will allow owners to write off all professional fees. If you decide to hire a property manager or a firm, any pm fees can be deducted. However, commissions for tenant placement should be noted as marketing and not management.
Real estate investors with large multi-unit properties or apartment buildings will often hire on-site property managers. Salaries and any benefits paid to these managers are fully deductible rental property expenses.
What if you want to manage your properties?
Owners with an entity like an LLC or corporation may “employ” themselves as a property manager, which means your salary will be a deductible expense. Then owners may take a deduction for property management software and things like marketing and tenant screening.
Speaking of Marketing and Advertising
If you are a do-it-yourself-kind-of-owner, then any money spent on advertising, either through websites like Zillow or paying for social media ads, is a deduction as well.
If you are an intelligent kind of owner (as I said, I am biased), you have hired a property manager; then you will be able to write off commissions such as tenant placement fees or tenant renewals fees. These fees are not chump change; they can go all the way up to the first month’s rent, so they are worth letting your CPA or account know about them.
HOA Fees
According to the IRS, their fees are deductible whether you enjoy homeowner associations or loath them. It is like two evil entities fighting each other. My feelings aside, this deduction does extend to condo association fees, planned unit developments (PUD), and the like.
In addition, owners may deduct items required by the HOA. For example, some HOAs require expensive rent signs that meet certain specifications. These sign expenses would generally be deductible.
5. Traveling Expenses
This one is pretty straightforward, and many business owners will be already familiar with is travel expenses or auto-related expenses. This includes any travel necessary to maintain and repair various rental properties. However, travel costs associated with property improvements can only be deducted through depreciation.
Travel costs that can be deducted include fuel costs, airfare, and hotel costs, to name just a few. Owners can also deduct the costs associated with the upkeep and repair of any vehicle used solely to perform landlord-related tasks.
Auto expenses can be deducted using the standard mileage method or the “actual” method. For 2020, the IRS set the rate at 57.5 cents per mile driven for business. The “actual” method uses the percentage of all actual vehicle expenses used for business. Both require records to be kept.
6. Supplies
Running a business is like taking care of a toddler; you have to feed it ink toner constantly. Ok, bad example, but you get the gist. Supplies are needed for everyday operations, and if you don’t have the right supplies, employees and managers will begin to cry foul. Whatever supplies are needed, whether it be ink toner, paper, paint, locks, plywood, mops, binders, those little black Clippy things that everyone always turns into airplanes, all these items fall under the miscellaneous column and can be written off.
7. Taxes and Fees
Did you know you can write off taxes on your taxes? Owners can write off property taxes on federal income taxes (as well as some state income taxes) and get a deduction. This will benefit owners that live in high property tax states—looking at you, New Jersey, and Illinois!
Owners can also write off any licensing fees and occupancy taxes as well.
8. Insurance
I have repeatedly said it, and I will say it again: Insurance is a scam! Now that that is out the way, insurance is essential, especially when operating a rental property. The good news is that insurance costs can be written off on federal taxes. It still does not change my mind about insurance, but hey, silver linings.
Typical types of rental property insurance include:
- Liability insurance
- Hazard and fire insurance
- Sewer backup insurance can be added to a hazard policy
- Flood insurance covers water coming from any source outside the home and is required by most mortgage companies
- Loss of income insurance can be added to a hazard policy, and cover lost rental income.
Insurance specifically for a rental property is generally 15% to 20% more than a policy for an owner-occupied policy. The average annual premium on landlord insurance is about $822. This varies depending on the rental property’s size, cost, and location.
Other forms of insurance, such as a landlord liability policy or umbrella liability policy that covers multiple properties, owners will want to seek the counsel of a tax professional or CPA to determine how it should be deducted. One option is to prorate the cost among each property; another possibility may be to deduct it from the overall business entity.
9. Utilities
Good news for owners with multi-family structures, utility costs can be written off as well. This will usually apply to owners who own multi-family properties with shared utilities or common areas.
Deductions for various common utilities can be claimed on:
- Heating bills
- Electricity
- Air conditioning
- Water
- Sewer
- Trash & recycling
- Internet, television & phone services
10. Legal & Professional Fees
Running a business means wearing many hats, from marketing to janitor. However, one that should never be worn is the lawyer hat. The law, especially in landlord and tenant relationships, can be tricky. It is always best to rely on a professional. In business, things are bound to happen, and a good real estate attorney can help guide owners. Other times, reading a million pages of lawyer gobblygook may take up too much time. In either case, hiring a professional will save some heartaches, and all their fees are deductible to boot.
Some examples of professional and legal fees may include:
- Legal work to prepare LLC entity
- Legal review or preparation of lease documents
- Bookkeeping services
- Tax filing preparation
- The tenant decides to sue an owner because they fell through the ceiling while storing things in the attic and were not aware drywall could support their weight. You may laugh, but this is truth comedy.
Final Thought
It is nice to read articles online to figure out things for oneself. However, it is strongly recommended that rental property owners contact a professional CPA or accountant and have them help with tax preparations for next year. I hope this gives a better idea of one of the significant benefits of owning a rental property. Taxes are required by all sorts of governments, but owners should not have to pay more than their fair share of them.
Michael Cordero
Broker & Property Manager for Ember RealtyThinking about selling or renting your property? Give Ember Realty a call today to learn more.
407-377-7847 or Info@emberrealtyfl.com
