You may only deduct expenses if they are considered ordinary and necessary in the line of business:
- An expense is considered ordinary if it is “common and accepted” with your industry. For example, an ordinary expense for a landlord could be paying a contractor to fix a roof leak.
- An expense is considered necessary if it is “helpful and appropriate” to your business. For example, a necessary expense for a landlord would be purchasing accounting software to keep track of all the records a landlord must document.
POINTS OF CAUTION
- You must keep detailed and accurate records if you are going to claim any of the following as deductions on your taxes.
- These are “common” tax deductions. They do not apply to every landlord, rental property owner or property investor.
- For example, many of these deductions do not apply to those who rent out homes for condos which are also considered their residence. The property is considered a residence if you have used it for personal use for more than “X” number of days in that year or “X%” of days that the property was rented out at fair market value. (These numbers are listed on Schedule E for the current year.)
- You must consult your accountant or the IRS to determine the correct way to file your taxes and the proper deductions for your specific situation.
COMMON TAX DEDUCTIONS
Depreciation expense is used for those things you have purchased for your business which have a useful life beyond the current tax year. For something to be considered depreciable, it has to meet 3 rules:
- Be expected to last for more than a year.
- Be valuable to your business in some way.
- Lose its value or wear out over time.
Examples of depreciable assest are:
- The purchase price of the property (minus the value of the land).
- Improvements to the property such as new kitchen cabinets or a new roof.
- Shrubbery or fences.
- Furniture or appliances
- Automobile for business use.
Owning rental property is considered a passive activity. There are complex rules which apply to passive activities, but in short, they limit your ability to claim losses incurred in passive activity against other types of income.
There are certain exceptions:
- If you are considered a real estate professional (certain rules apply such as working at least 750 hours a year on real estate related activities), any rental real estate activities you participate in are not considered passive activities.
- If you are considered actively involved in your rental activity, you can deduct up to $25,000 in passive rental losses if you make under $100,000. Actively involved means you must have participated in making management decisions, such as finding tenants or deciding on the terms of your rentals and your interest in the rental activity has never been less than 10% for the year. The amount you can deduct will decrease for every dollar your income is above $100,000. You will not be able to deduct any passive activity loss once your income reaches $150,000.
You may deduct the expense of repairs. Repairs are considered work that is necessary to keep your property “in good working condition”. They do NOT add significant value to a property. Repairs include things like painting or roof repair. It is important to understand that all maintenance you do on your property is NOT considered repair. The IRS makes a distinction between improvement and repairs.
Landlords are allowed to deduct certain local and long distance travel expenses that are business related. This does not include commuting expenses, meaning traveling from your home to your everyday office or place of business.
If you have your own vehicle for local travel, you can take your deduction using either the standard mileage rate or using the actual expenses incurred, such as the cost of gasoline and maintenance on the vehicle. You can also deduct parking fees and tolls, interest on a car loan and any applicable registration or license fees and taxes. If you do not have a vehicle, you can deduct your public transportation expenses for business purposes.
Many rental property owners live in other states from their rental properties and sometimes travel to visit the property. If you travel to visit your property, don’t forget to keep all receipts and take advantage of these deductions.
You can deduct the interest you have paid on business related expenses. For example: You can deduct the interest you have paid on mortgage payments or other business loans, car loan payment (but only the part used for business purposes) and the interest paid on credit cards used solely for business purposes.
You can take the home office deduction if you use a part of your home exclusively as an office for your business. You must conduct the majority of your business here to claim the deduction. The amount you can deduct depends on the percentage of your home that your home office takes up.
Unfortunately, entertainment costs do not refer to costs used to entertain yourself. Entertainment costs mean those incurred during business dealings. For example, taking a client to your country club or giving a potential investor tickets to the theater are entertainment expenses.
LEGAL AND PROFESSIONAL FEES
This includes the fees you pay to an attorney, accountant, real estate agent or fees paid to other professional advisors.
You can deduct the wages you pay to someone who does work for you, such as the wages of both full-time employees, such as a live in Property Manager or Maintenance employee and part time employees, such as a contractor you hire once to fix a roof leak.
You can deduct your property taxes, real estate taxes and sales tax on business related items that are not considered depreciable for the year. You can deduct fees for tax advice and the preparation of tax forms related to your rental real estate property. However, you cannot deduct legal fees from defending title of the property, to recover property or to develop or improve property. You must add these types of fees to your property’s basis.
You can deduct the premiums you paid on most types of insurance including health, accident, causality, theft, flood, fire, liability, vehicle and health insurance for your employees.
If your property was damaged by a catastrophic event like a fire, you may be able to deduct some or all of the loss. The amount you can deduct will depend on your insurance and the amount of damage to the property.
OTHER COMMON TAX DEDUCTIONS INCLUDE:
- Advertising costs.
- Rent you paid to others.
- Telephone calls related to your rental property activities. However, you cannot deduct the first line for local service coming into your home. That is considered a personal line.
- You can credit or deduct expenses paid to make your property accessible to individuals with disabilities or the elderly.
- If your property is considered a commercial building, you can deduct costs to make it energy efficient.