Think your landlord has it made? Just wait until you find out about the tax breaks she’s eligible for. Owning a rental property certainly comes with its fair share of frustrations. When you consider what landlords stand to save on their income tax bills, however, you might want to give the job a second thought. A financial advisor can help you create a financial plan for your real estate goals. Let’s break down five ways property owners save during tax season.
1. You Can Earn the Mortgage Interest Deduction
Homeowners can deduct their mortgage interest for home loans with values of up to $1 million. They can also deduct some of the money they’ve borrowed that’s part of their home equity loan. But you don’t have to own your own home to get the deduction.
Landlords can take advantage of the tax break too by deducting the mortgage interest they’ve paid to buy or fix up their properties. This is typically the largest deduction that they can claim. When refinancing a property for more than it was worth originally, property owners can deduct additional amounts of interest and fees if the extra funds were used to improve or maintain the property.
2. You Can Qualify for Deductions That Homeowners Don’t
Although there are many deductible expenses for your federal taxes, deductions specifically for homeowners are limited. That’s not the case for landlords. Besides interest and mortgage points paid over the life of the loan, property owners can score deductions for different kinds of insurance premiums, including homeowners insurance and health insurance for their workers.
If you rent an apartment and you accidentally break something, you can’t get a tax write-off for covering the damage with money from your own pocket. But if you’re a landlord, you can deduct the cost of repairs that you’ve made for your tenants. Utilities like gas and electricity and property taxes that aren’t paid by the tenants are also deductible.
Check out our property tax calculator.
3. There’s a Depreciation Deduction
Another special benefit for landlords is the tax breaks they receive for the breakdown of their properties over time. They don’t get to deduct the full value of depreciation all at once, though. Rather, they must deduct those costs over a period of time: 27.5 years for residential properties and 39 years for commercial real estate.
When it comes to the depreciation deduction, there are other IRS guidelines. Only the value of the property’s structure and depreciating items inside the property (like appliances and windows that must be replaced) count as deductible costs. Depreciation begins as soon as the property is ready to be rented and ends either when you stop renting it out or when you’ve recouped the entire cost of your investment, whichever comes first.
There’s a catch, of course. The value of the land that the property sits on cannot be deducted. So for a $250,000 house, a landlord could only deduct the value of the building, and not the land valued at $70,000. If they rent the house for 27.5 years, their annual deduction would be roughly $6,545.
4. Travel Costs Are Deductible
Property owners who make routine trips to check on their tenants aren’t inconveniencing themselves, even if they have to go the distance to get to their properties. After all, they can deduct their travel expenses. That includes the cost of taxis, parking fees and gasoline if they’re using their own cars to make the trek. Instead of deducting individual expenses for car travel, landlords can opt to use the standard mileage rate, which is set at $0.67 cents per mile for the tax year 2024, which was up from $0.655 in 2023.
If you’re a landlord who lives in a different state from your rental property, you can deduct the cost of rental cars, airfare and hotel rooms. Meals that you enjoy during your journey are deductible as well. It’s a good idea to tread carefully when it comes to deducting expenses for overnight trips, however. You could get audited by the IRS for deducting extra costs that you use to have fun while you’re traveling.
5. Legal Fees Count as Deductible Expenses Too
Unfortunately, some matters can only be settled inside of a courtroom. Landlords who are forced to evict tenants or take legal action for any other reason have the upper hand, at least from a financial standpoint. Unlike their tenants, they can deduct court fees andattorney fees. So if anything bad happens, at least you deduct those expenses to take care of it.
Bottom Line
Property owners enjoy a variety of perks at tax time. As long as they keep up with theirreceipts and have documentation to support their deductions, they have the opportunityto substantially reduce their tax bill. If you’re thinking about becoming a landlord, the deductions we’ve mentioned might be enough to convince you to take the plunge.
Tips for Filing Taxes
- A financial advisor can optimize your tax strategy for your real estate goals and needs. Finding a financial advisor doesn’t have to be hard.SmartAsset’s free toolmatches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- When it comes to property and other assets, it’s important to do your research about the depreciation guidelines the IRS sets. This will give you a better idea of both your deduction term and rate, as well as your potential tax deductions.
- If you don’t know whether you’re better off with the standard deduction versus itemized, you might want to read up on it and do some math. You might find that you’d save a significant amount of money one way or another, so it’s best to educate yourself before the tax return deadline.
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