949-392-1999
SHOW NOTES FOR EPISODE 552: BEST RENTAL PROPERTY TAX DEDUCTIONS
Most real estate investors purchase rental property for the monthly income, potential appreciation in property value over the long term, and the available tax deductions. In today’s podcast, Bill will take a quick look at how deductions on rental properties work, then he will review 25 of the best rental property tax deductions, including a few that many investors overlook.
Tip of the Week: Know where you’re going before you start
If I had to name the #1 most important lesson that new real estate investors should know, it’s to have a clear strategy. Know where you want to go and how you’re going to get there – before you spend a single penny on real estate.
That’s because there are so many different factors and variables in real estate investing. It’s much too easy to get sidetracked if you haven’t done your market research and formulated your own personal real estate investment strategy. For example, there are four major real estate asset classes: residential, commercial, land, and special use. Then there are three main real estate investment strategies: core, value-add, and opportunistic. One investor might find that opportunistic fixing-and-flipping houses works for them, while another discovers that longer-term, core buy-and-hold investments are more to her liking.
New real estate investors should pick a strategy – decide what works best for them and their personal investment situation and goals – and then stick to it, fine-tuning their real estate investment strategy along the way.
Best Rental Property Tax Deductions
Most real estate investors purchase rental property for the monthly income, potential appreciation in property value over the long term, and the available tax deductions. In today’s podcast, I’ll take a quick look at how deductions on a rental property work, then review 25 common rental property tax deductions, including a few that many investors overlook.
What are Rental Property Deductions?
As the IRS reminds, an owner of rental property has a federal tax responsibility to report all rental income on the tax return and deduct the associated expenses from the rental income. Common deductions a rental property owner can take include:
- Necessary expenses for managing and maintaining a rental property
- Ordinary expenses such as mortgage interest, taxes, advertising, utilities, and insurance
- Certain materials and supplies
- Depreciation expense to recover the cost of the building and improvements
A Quick Look at How Deductions Work
A simplified version of an investor’s rental property income and expenses reported on Schedule E might look something like this:
- Rents received = $18,000
- Operating expenses = <$10,000>
- Depreciation = <$5,000>
- Owner expenses (such as visiting the property) = <$1,000>
- Income reported on Schedule E = $2,000
Any remaining taxable net income (or loss) from the rental property is then reported on Form 1040, Schedule E, Part I and is added to an investor’s total taxable income.
However, even though the income from a rental property has already been reduced by deducting operating expenses and owner expenses, an investor can still claim additional deductions included on Form 1040 such as a standard or itemized deduction before paying personal income tax.
In this example, even though the rental property itself generated a positive cash flow of $8,000, taxes are paid on less than $2,000 (after accounting for the investor’s standard deduction or itemized deduction).
25 Best Rental Property Deductions
Many beginning real estate investors are pleasantly surprised to learn that tax law in the U.S. is extremely friendly to rental property owners. Deductions can be made for normal expenses incurred in owning and managing a property, while non-cash expenses like depreciation can further reduce taxable net income.
Here’s a list of 25 common rental property deductions for real estate investors, listed in alphabetical order:
1. Advertising & Marketing
Printing and installing “For Rent” signs, building and launching a property website, professional photography and videos, and fees paid to rental listing websites are fully tax deductible.
2. Closing Costs
Interest, mortgage points, and real estate taxes can be deducted the year they are incurred. Other real estate closing costs such as recording fees, transfer taxes, and title insurance must be added to the cost basis of the residential property and depreciated over 27.5 years.
3. Continuing Education
Fees paid to attend real estate seminars, boot camps, for coaching, to purchase books on real estate, and tuition for continuing education classes are tax deductible owner expenses.
4. Depreciation – Building
Real estate investors can help offset the cost of rental property through deductions for depreciation. IRS Publication 946 explains how to depreciate residential real estate over 27.5 years to reduce taxable net income. For example, if the value of a single-family rental home is $110,000 (excluding the lot), investors can claim a depreciation expense of $4,000 per year.
5. Depreciation – Segmented
The IRS also allows rental property owners to depreciate items such as new appliances and carpeting over 5 years, office furniture and equipment over 7 years, and roads and fences over 15 years.
6. Dues & Subscriptions
Many investors take advantage of free online resources for learning about real estate investing. In addition, paid subscriptions to real estate publications and reports and dues to a real estate club are fully tax deductible.
7. Home Office
Real estate investors who work from home may qualify for a home office deduction. The IRS offers a simplified home office deduction that is easy to calculate and expense from rental property income.
8. Insurance
Landlord insurance premiums are another tax deductible expense real estate investors can claim. Rental property owners purchase this policy to help protect the home and for extra landlord liability protection.
9. Mortgage Interest
Interest paid on a mortgage and interest on a business credit card used to purchase services, materials, and supplies for the property is tax deductible. At the end of each year, the lender will send a statement itemizing annual interest expense to make booking the deduction easier.
10. Landscaping
Recurring expenses paid for cutting the lawn and trimming shrubs and trees are fully deductible, as are seasonal costs like gutter cleaning and snow removal.
11. Leasing
A commission paid to a real estate agent to find a new tenant is fully tax deductible the year the fee is paid. Leasing commissions on rental property are generally equal to one month of rent, while renewal fees are typically one half of one month of rent.
12. Licenses
Annual costs for a sales and use tax license, a local business license, and annual registration for a limited liability company (LLC) are deductible expenses for owning and operating a rental property.
13. Maintenance
Routine maintenance expenses such as semi-annual heating and air conditioning service, inspecting smoke alarms for proper operation, and replacing air filters are three examples of deductible maintenance expenses for a rental property.
14. Office Supplies
Written lease and legal forms, pens and paper, and printer ink are expenses many property owners incur that are fully tax deductible.
15. Professional Fees
Hourly rates, flat fees for service, or retainers paid to a tax advisor or real estate attorney are another rental property tax deduction.
16. Property Management
A good property manager handles day-to-day tasks such as rent collection, tenant communication, vendor coordination for repairs, and routine property inspections. Property management fees vary from place to place, but usually run about 8% of the monthly rent collected and are fully deductible.
17. Property Tax
Property taxes on a mid-sized single-family rental home may range from a few hundreds dollars a year to several thousand or more, depending on where the property is located. Fortunately, property taxes can be fully deducted from income generated by a rental property.
18. QBI Pass-Through Deduction
The Qualified Business Income (QBI) deduction allows many rental property owners to deduct 20% of the income from a rental property business from the total taxable business income amount. Claiming this pass-through deduction for real estate can be complicated, which is why many investors seek guidance from a tax professional.
19. Repairs
Fixing a plumbing leak, repairing a light socket that’s shorting out, and unclogging the kitchen disposal are examples of tax deductible repair expenses on a rental property.
20. Sales Tax
Some municipalities require a landlord to collect a sales or use tax on rent paid by a tenant. Taxes are collected as part of the rent payment, and remitted to the city or state once a month.
21. Telephone
Many rental property owners purchase a cell phone specifically for business use and pay for the monthly service using a business credit or debit card.
22. Tenant Screening
While many landlords require a tenant to pay to be screened, others consider the cost of tenant screening as a normal business expense. Fees paid by a landlord for tenant screening reports such as a credit check, rental history and eviction report, and criminal background check are rental property tax deductions.
23. Travel – Local
Auto costs such as going to a property for showings, meeting a contractor for an estimate, and picking up supplies using the standard mileage rate deduction of 57.5 cents per mile or the actual expense incurred.
24. Travel – Remote
Long distance travel expenses to visit a rental property in another city or state or attend an out-of-town seminar are generally tax deductible. However, the IRS requires the purpose of the travel to be mainly for business, and expenses to be reasonable.
25. Utilities
Sometimes, a small multifamily property like a duplex or triplex has a master meter for electricity, water, or gas. Landlords who pay for utilities include the cost in the tenant’s monthly rent, then deduct the utility cost as an operating expense.
Reference:
- https://www.stessa.com/blog/rental-property-deductions-checklist/
- 497: New Tax Changes for 2020 and 2021
- 092: Last Minute Real Estate Investor Tax Checklist
- 033: Tax Strategies for Real Estate Investors
- 403: How to Save Big Money With Cost Segregation
IF YOU LIKED THIS PODCAST, we would love if you would go to iTunes, Stitcher, GooglePlay, iHeartRADIO and Spotify and Subscribe, Rate & Review our podcast. This will greatly help in sharing this podcast with others seeking to learn real estate investing as a means to achieve a successful retirement.
Check out our other podcasts at olddawgsreinetwork.com.
Get a FREE copy of our 3-Minute Rental Property Analyzer at olddawgsreinetwork.com
