Tax Deductions for Landlords
Tax Deductions for Landlords
I would uphold the law if for no other reason but to protect myself.
- Thomas More
Owning a rental property can be a rewarding venture because of its many tax deduction features. The US government lets land owners and landlords deduct certain expenses on their taxes that can offset their assessable income.
Landlords are likely to have tax due to depreciation, which is a non-cash expense. Residential buildings are depreciated over 27.5 years and commercial buildings over 39 years. However, your ability to actually deduct rental tax losses may or may not be postponed by the passive activity loss (PAL) rules.
The default treatment of tax losses from owning rental real estate is to consider them passive activity losses (PALs). That's unfavorable because you can only deduct PALs to the extent you have passive income from other sources (such as income from other rental properties or gains from selling rental properties). Excess PALs are suspended until you have enough passive income to deduct them. You can also deduct suspended PALs when you sell the properties that generated the PALs.
There are two taxpayer-friendly exceptions to the PAL rules: 1) for active investors - owning a 10% or greater stake and at least making management decisions like approving tenants, signing leases, authorizing repairs, and so forth; or 2) for real estate professionals - spending over 750 hours during the year in real estate activities including non-rental activities such as acting as a realtor or real estate broker) in which you materially participate. In addition, the hours you spend on real estate activities must exceed 50% of all the time you spend working on personal service activities.
Common tax Deductions for Landlords
Expenses can be deducted if they belong to ordinary and necessary in the line of business:
• Ordinary Expenses. This refers to "common and accepted" within the industry.
• Necessary Expenses. This refers to "helpful and appropriate" expenses for the business.
Points of Caution
• If you want to claim any deductions to your taxes, you must keep a detail and accurate records of the expenses.
• Even if this is common tax deductions, this is not applicable to all landlords, rental property owner or property investor.
Common Tax Deductions
• Depreciation. These expenses refer to the things purchased for the business which is still useful beyond the current tax year. It has to meet three rules :
o It should last more than a year
o It should be of value to the business
o Wear out or lose its value over time
Examples of depreciated assets:
o Purchase price of the property
o Improvements done in the property
o Added fences or shrubbery
o Appliances or furniture
o Car for business use
• Passive Activity Losses. This limits your ability to claim losses that have incurred in passive activity from other types of income. Having a rental property can be considered as a passive activity, unless you are an active investor or a real estate professional, as described above.
• Repairs. These are work necessary to keep your property in good working condition. Painting can be part of the repair. These upgrades do not add value to the property. Not all maintenance done in the property is considered repairs. Be aware that IRS makes distinction between improvement and repair. Improvements can add value to the property and cannot be deducted in full in the year they incurred. Improvements in property will be capitalized and depreciated over their useful life.
• Travel Expenses. This refers to long distance and certain local travel expenses as long as they are business related. It does not include the daily traveling from your home to your place of business.You can take deduction when you have a car using standard mileage rate or using the actual expenses incurred such as depreciation on the vehicle, gasoline and vehicle maintenance and other vehicle related expenses. Public transportation expenses use when conducting business can also be deducted when you do not have a car.
• Interest. You can deduct the interest on paid business related expenses.
• Home Office. If you use part of your home as an office you can deduct it as part of a home office deduction. The amount depends upon the percentage of the home office takes up from your home.
• Entertainment Costs. These are cost incurred during business dealings.
• Legal and Professional Fees. Hiring a professional to do work for the business allows you to deduct the fees paid them.
• Employee Compensation.You can deduct the wages to pay employees involved in running the business as business expenses.
• Taxes.Property tax, real estate taxes and sales taxes on business related items that are not depreciable for the year can be deducted. You can also deduct fees for tax advice and the preparation of tax forms related to the real estate property.
• Insurance. Premiums paid for commercial insurance, liability coverage, health insurance for employees, etc. can all be deducted.
• Casualty Losses. Damage to property that happen during a catastrophic event like fire can be part of the deduction.
Other Common Tax Deductions Include:
• Advertising costs
• Rent paid to others
• Telephone calls related to your rental property activities
• You can credit or deduct expenses paid to make your property accessible to individuals with disabilities or the elderly