Ten Tax Deductions All Landlords Should Know About
When it comes time to file your taxes as a landlord, taking advantage of common tax deductions can have a significant impact on your bottom line. Here’s a list of ten deductions that every landlord should be familiar with.
1. Interest
As a landlord, interest might be your biggest deduction. Landlords can deduct mortgage interest payments on loans used to acquire or improve rental property, as well as interest payments on credit cards for goods or services related to the rental property. To keep track of how much interest you’ve paid on your mortgage, check the IRS Form 1098 you receive from your lender. Note that the 2018 Tax Cuts and Jobs Act limited the interest deduction for landlords who earn more than $25 million from their rentals.
2. Rental Real Property Depreciation
Every year, rental property wears out and decays little by little. Depreciation is an annual tax deduction that landlords can take to reflect this annual cost of doing business. The IRS assigns a period of time (called the recovery period) over which landlords must depreciate the basis (usually the cost of the property minus the price of the land) of the property. Depreciation of real estate can be complicated, so it’s best to consult with an accounting professional to learn more. You can also read IRS Publication 946, How to Depreciate Property and the instructions for IRS Form 4562 (Depreciation and Amortization (Including Information on Listed Property)) for all the juicy IRS-provided details.
3. Repairs
The ordinary, necessary, and reasonable costs of repairing rental property are deductible. For example, landlords can deduct the costs of repainting the rental, fixing its leaky roof, and fixing the holes in its walls. Categorizing repairs for depreciation can be tricky, though, as more extensive repairs can cross into “restoration” or “improvement” territory: fixes that the IRS treats differently from repairs. For example, replacing a few boards in a deck due to rot is a deductible repair, but if the entire deck needs to be replaced, it is a restoration that must be treated as an improvement for tax purposes.
4. Personal Property
As of 2018, with the passage of the Tax Cuts and Jobs Act, landlords can write off in one year 100% of personal property used in a rental or related to a rental. This is known as the de minimis safe harbor deduction, and it applies to certain property purchased through 2022, with bonus depreciation declining incrementally thereafter. For more information, see the IRS’s FAQ on Tangible Property Regulations.
5. Pass-Through Tax Deduction
The pass-through tax deduction established by the Tax Cuts and Jobs Act is a special income tax deduction (not a rental deduction). Landlords who meet certain income restrictions might be able to deduct either up to 20% of their net rental income or 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.
6. Travel
Most likely, your biggest expense in the travel category will be for the use of your vehicle. For example, you can write off the cost of traveling to work on your properties, to show vacant units, and to meet with tenants or contractors. Two main options for writing off vehicle expenses exist. The first is to track the number of miles you travel for rental-related activities, then write off a standard, IRS-provided rate per mile (57.5 cents per mile in 2020). To make tracking easier, consider using an app such as MileIQ, Stride Tax Mileage Tracking, or Hurdlr.
The second is to track and deduct your annual auto expenses (for example, the cost of gas, repairs, insurance, and parts). Note that you can deduct only the costs associated with rental-related work; if you use your vehicle for other uses you will have to determine what percentage of the use was rental-related, and deduct proportionally. For more information, see IRS Topic 510, Business Use of a Car and IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses.
7. Home Office
If you have a space in your home that’s dedicated to your landlording activities, you might be able to deduct the expenses associated with this home office. The space does not have to be a traditional office to qualify—it can be a workshop or storage shed in which you keep your landlord supplies or otherwise use for your rental business. The IRS’s page on home office deductions provides details on how to qualify for the deduction.
8. Employees and Independent Contractors
The wages you pay others to perform tasks relating to your rental activities are deductible. For example, if you have a leasing manager, you can deduct this person’s pay as a rental business expense. You can also deduct the amounts you pay to independent contractors, such as handypersons or cleaning services.
9. Insurance
Insurance is one of the easiest deductions to keep track of—either ask your insurance broker for or download a statement of how much you pay annually for insuring your rental-related activities. You can write off the costs of fire, theft, flood, and landlord liability insurance. If you have employees, you can also deduct the cost of health and workers’ compensation insurance.
10. Legal and Professional Services
Every landlord will likely need some sort of professional service assistance at some point. The good news is that you can deduct any amounts you spend on legal, accounting, property management, and other professional assistance relating to your rental. Note, however, that some legal fees you might incur for purchasing rental property are not deductible—you’ll want to consult with a tax professional about any purchase-related legal fees.
The above tax deductions for landlords are just the tip of the iceberg. Each deduction is subject to specific criteria and guidelines, so if you have any questions about whether one or more is applicable to your situation, consult a tax professional. Also, Nolo’s book, Every Landlord’s Tax Deduction Guide, by Stephen Fishman, goes into great detail on how landlords can maximize their deductions without drawing the ire of the IRS.