Here are 10 of the top tax write-offs for landlords. However, depending on your circ*mstances, there might be way more than 10 tax deductions you can take advantage of as a landlord.
As a landlord, understanding the various rental property tax deductions available can help you make the most of your investment and reduce your tax bill. From mortgage interest to repairs and maintenance, there are several expenses that you might be able to deduct to help offset the costs of owning and managing rental properties.
With so many potential tax write-offs available, it can be challenging to know what might apply to your situation. In this article, we'll explore the top 10 rental property tax deductions that landlords should be aware of. By taking advantage of these tax deductible rental property expenses, you can maximize your savings and ensure that your rental business is as profitable as possible.
Top 10 Tax Deductions for Landlords
Landlord Tax Deduction #1: Interest
Interest payments are often a landlord's single biggest deductible expense. The most common interest-related tax write-offs for landlords include:
- mortgage interest payments on loans used to acquire rental property
- mortgage interest payments on loans used to improve rental property, and
- interest on credit card debt acquired to pay for rental-related goods and services.
Landlords with average gross receipts of $25 million or more (this amount adjusts annually for inflation) over the past three years can deduct only up to 30% of their adjusted taxable income. (I.R.C. § 163(j).) (You might hear this limit referred to as the "Section 163(j) Limitation.") However, such landlords can avoid this limit by agreeing to depreciate their rental property over 30 years.
Landlord Tax Deduction #2: Depreciation for Rental Real Property
The actual cost of a house, apartment building, or other rental property is not fully deductible in the year in which you pay for it. Instead, landlords get back the cost of real estate through depreciation. This involves deducting a portion of the cost of the property over several years (27.5 years for residential real property). Landlords can reap the benefits of depreciation even if the property increases in value.
Landlord Tax Deduction #3: Repairs
A significant tax break for landlords can arise when they make repairs to their properties: The cost of repairs to rental property (provided the repairs are ordinary, necessary, and reasonable in amount) are fully deductible in the year in which they are incurred. Good examples of deductible repairs include repainting, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows.
Landlord Tax Deduction #4: Personal Property
Most landlords own personal property that is used in their rental property. For example, appliances in the unit are considered personal property. Most landlords also own personal property that they use in rental activities, such as maintenance and gardening equipment and computers. The cost of personal property used in your landlord business can usually be deducted in one year using the de minimis safe harbor deduction (for property costing up to $2,000) or 100% bonus depreciation which remains in effect for property purchased and placed in service during 2018 through 2022. (The percentage of bonus depreciation allowed decreases for property purchased and placed in service each year after 2022.)
Landlord Tax Deduction #5: Pass-Through Tax Deduction
As of 2018, most landlords qualify for a pass-through tax deduction established by the Tax Cuts and Jobs Act. This deduction is a special income tax deduction, not a rental deduction—this means that you might be able to reduce your effective income tax rate on your rental income. How you calculate the pass-through deduction depends on how much annual taxable income you have.
Under the current rules, landlords might be able to deduct (1) up to 20% of their net rental income, or (2) 2.5% of the initial cost of their rental property, plus 25% of the amount they pay their employees. This deduction is scheduled to expire after 2025.
Landlord Tax Deduction #6: Travel
Another one of the tax benefits of owning rental property is the tax deduction for business-related travel. Landlords are entitled to a tax deduction for most of the driving they do for their rental activity. For example, when you drive to your rental building to deal with a tenant complaint or go to the hardware store to purchase a part for a repair, you can deduct your travel expenses. However, you can't deduct the cost of travel you do to improve your rental property—these expenses must be added to the property's tax basis and depreciated over many years.
If you drive a car, an SUV, a van, a pickup, or a panel truck for your rental activity (as most landlords do), you have two options for deducting your vehicle expenses. You can either:
- deduct your actual expenses (gasoline, upkeep, repairs), or
- use the standard mileage rate (check the IRS website for current rates).
If you don't use the standard mileage rate to deduct your vehicle expenses in the first year you use a car for your rental activity, you're prohibited from using it in the future. So, if you're not sure whether to use the standard mileage rate or deduct your actual expenses, it's a good idea to use the standard mileage rate for the first year so that you continue to have it as an option in the future.
Learn more about deducting landlord car expenses.
If you travel overnight for your rental activity, you can deduct your airfare, hotel bills, meals, and other expenses. If you plan your trip carefully, you can even mix landlord business with pleasure and still take a deduction.
However, IRS auditors closely scrutinize deductions for overnight travel—and many taxpayers get caught claiming these deductions without proper records to back them up. To stay within the law (and avoid unwanted attention from the IRS), you need to properly document your long distance travel expenses.
Landlord Tax Deduction #7: Home Office
Provided they meet certain minimal requirements, landlords may deduct their home office expenses from their taxable income. This deduction applies not only to space devoted to office work, but also to a workshop or any other home workspace you use for your rental business. The deduction is available to both homeowners and renters.
Landlord Tax Deduction #8: Employees and Independent Contractors
Whenever you hire anyone to perform services for your rental activity, you can deduct their wages as a rental business expense. This deduction applies regardless of whether the worker is an employee (for example, a resident manager) or an independent contractor (for example, a repair person).
If you hire independent contractors for your rental business, pay special attention to the unique IRS rules regarding how you must treat independent contractors.
Landlord Tax Deduction #9: Insurance
You can deduct the premiums you pay for almost any insurance for your rental activity. This includes fire, theft, and flood insurance for rental property, as well as landlord liability insurance. And if you have employees, you can deduct the cost of their health and workers' compensation insurance.
Landlord Tax Deduction #10: Legal and Professional Services
Finally, you can deduct fees that you pay to attorneys, accountants, property management companies, real estate investment advisors, and other professionals. You can deduct these fees as operating expenses as long as the fees are paid for work related to your rental activity.
Other Important Tax Tips for Landlords
Did you know that:
- Landlords can greatly increase the depreciation deductions they receive the first few years they own rental property by using cost segregation.
- Careful planning can permit you to deduct, in a single year, the cost of improvements to rental property that you would otherwise have to deduct over 27.5 years.
- You can rent out a vacation home tax-free, in some cases.
- Most small landlords can deduct up to $25,000 in rental property losses each year.
- A special tax rule permits some landlords to deduct 100% of their rental property losses every year, no matter how much.
- People who rent property to their family or friends can lose virtually all of their tax deductions.
If you didn't know one or more of these facts, you could be paying more tax than you have to. For more details about tax deductions for landlords and tax tips in general, check out the links in this article, and consider reading through:
- Every Landlord's Tax Deduction Guide, by Stephen Fishman (Nolo)
- Home Business Tax Deductions, by Stephen Fishman (Nolo)
- Nolo's section, and
- Nolo's Taxes
