Is April 15th coming upon us already? It’s hard to believe another tax season has arrived. Let’s be honest - the process of assembling documents, completing forms, and filing our returns each year must be one of life’s least pleasurable activities.
However, for many of our clients who own real estate investment properties, the annual sting of potential tax obligations is often a bit less worrisome than for those who don’t. There are several reasons why and it's worth highlighting a few here. In this post, we’ll focus on one of the biggest reasons: deductions.
As with any tax benefit, certain restrictions apply, and we recommend potential investors and property owners always consult with a tax professional for proper counsel; that would include obtaining additional insights on many of the deductions we identify here. In general, however, the deductions afforded rental property owners can be quite compelling. According to a recent article from Nolo.com, here are ten of the most popular deductions available to landlords:
This includes not only mortgage interest payments on loans used to either buy or improve a property but even interest on credit cards used for purchases of services or products related to maintaining a property.
Even though most rental properties appreciate over time, rental property owners are allowed to depreciate the non-land portion of their properties either over 27.5 years if residential or 39-years if non-residential. This write off can substantially reduce the tax liability on rental income received by landlords. Furthermore, it may be possible to accelerate the amount of allowed depreciation through utilizing bonus appreciation allowances permitted under the recent Tax Cuts and Jobs Act of 2017 (TCJA).
Need to replace some light fixtures? Is it time to repaint? Required to fix a roof? All these expenses can be deducted in the year they were incurred. The recent Tax Cuts and Jobs Act broadens the list of eligible items that can be expensed in the first year of use.
4. Personal Property
Owners often miss this one, thinking that personal property purchased for use in a rental property needs to be capitalized. But the IRS permits deductions for certain purchases under the de minimis safe harbor deduction (i.e., property valued at less than $2,000). These expenses often include appliances and furniture in rental units and landscaping equipment related to property maintenance.
5. Pass-Through Tax Deduction
The 2017 Tax Cuts and Jobs Act enabled landlords to qualify for a special (income) pass-through tax deduction. Depending on a landlord’s income, he might be able to deduct up to 20% of his net rental income thereby reducing the amount of taxes that would otherwise be owed. This deduction is scheduled to expire after 2025.
Most of the travel costs borne by landlords associated with their rental properties can be deducted. If you drive a vehicle you can use the standard mileage rate permitted by the IRS ($.58/mile in 2019) or deduct actual expenses for gasoline, car maintenance, etc. Even overnight travel costs, airfare, meals and lodging associated with remote rental properties may be deductible.
7. Home Office
Home office expenses are often tricky as they relate to permissible deductions and there are certain requirements that need to be met. That said, however, landlords may be able to deduct home office expenses related to space delegated for use of managing the rental property.
8. Employees and Independent Contractors
Wages paid to workers providing services for a rental activity can be deducted as a rental business expense. It doesn’t matter whether the worker is a company employee or an independent contractor.
Premiums paid for most types of insurance for a rental property can be deducted. These include premiums for policies that cover liability for the owner as well as property insurance for fire, theft and flood. Even costs for employees’ health and workers' compensation insurance are deductible.
10. Legal and Professional Services
Finally, any fees paid to attorneys, accountants, real estate investment advisors and property management companies can be deducted as operating expenses if the fees are paid for work related to a rental activity.
To minimize the odds of tax authorities denying or reducing claimed deductions, landlords must get in the habit of keeping scrupulous documentation and records of expenses, travel dates, and even the amount of hours that they or others worked on their behalf to manage their properties.
Due to recent changes in permitted deductions, we strongly encourage landlords to seek out the assistance of qualified tax professionals when completing their tax returns. The added costs of hiring a competent tax advisor to review possible deductions and sign off on your tax return may be easily offset by greater peace of mind and more after tax money in your pocket.
Hopefully, this helps provide an understanding of the potential tax benefits of investment property ownership. In a future post, we’ll discuss some of the benefits afforded investors who have used a 1031 Exchange or Delaware Statutory Trust to purchase and own investment property. These structures are well-known for their ability to allow investment property owners to sell and reinvest while deferring any capital gains tax on their current property’s appreciation.