Investing in real estate can be a smart financial move, but you’ve got to understand what to claim as income or track as expenses from your investment. First, keep good records of all income and expenses – including receipts – related to your rental property. Then, take note of these tax tips for landlords. They’ll help ensure you’re tracking the right things and taking advantage of the deductions you’re eligible for.
Also, note that the Tax Cuts and Jobs Act (TCJA) has just gone into effect and includes some changes that impact landlords. Read about the changes, and talk to your accountant to make sure you’re taking advantage of any deductions available to you.
Deductions for Landlords
As a general rule, you can deduct any expense related to your rental property, including, but not limited to:
- Mortgage interest
- Mileage incurred managing the property
- Property taxes
- Maintenance (lawn care, pest control, replacement lights, filters, batteries, detectors, etc.)
- Insurance premiums
- Utilities that you pay for
- Travel costs (to manage the property)
- Property management fees
- Legal and professional fees
- Home office & operating expenses, like square footage used solely to manage your property, rent paid for office space, phone bills, or a printer used solely to produce leasing documents
Repairs vs Improvements
You’ve done your due diligence and kept detailed records and receipts throughout the year. Now, it’s time to deduct those expenses. But how do you tell the difference between a repair and an improvement, and how are those treated differently when it comes to your taxes?
Repairs are actions that could generally be considered maintaining or restoring the existing functionality of a home. Taking care of a leaky faucet, installing a new doorknob, clearing a clogged drain or fixing a ceiling fan are examples of repairs. You can claim expenses for repairs, in their entirety, during the tax year in which you performed them.
Improvements are large expenditures that are generally considered to ‘improve’ the status of the home beyond its original state. Installing a pool, buying a new appliance, building a fence, or adding an extra room are improvements. These expenses must be depreciated over several years.
Depreciation & Recapture
In addition to depreciating improvements to your rental home, you can also depreciate the value of the property itself. This is one of the largest tax benefits of being a landlord. Depreciation can get complicated, though. For example, you can only depreciate the value of the structure, not the land it sits on, over the course of 27.5 years. You can get familiar with depreciation guidelines at IRS.gov: How to Depreciate Property.
If you’re depreciating your property, you also need to know about recapture, which is sometimes called negative depreciation. When you sell your property, the IRS will recapture some or all of the depreciation you’ve claimed over the years, and it can be a nasty surprise if you haven’t planned for it.
Limit on Losses
Landlords may be able to deduct up to $25,000 of losses from your nonpassive income, if you and our spouse participated in a passive rental real estate activity. This gets a little tricky, so it’s a situation you’ll definitely want to discuss with your accountant.
For example: If you had $65,000 in depreciation and expenses for a property in a given year, but the property only generated $30,000 in rental income, you’d be left with a $35,000 loss. You can claim $25,000 of losses for that year. Then, you can “recapture” the remaining $10,000 in losses the next year.
For more details, read IRS Publication 925.
Do You Use a Property Manager? Know Which Tax Forms are Coming
If you contract with a property manager, like Greyhaven Realty Management, to handle the day-to-day details related to your real estate, you should receive a 1099-MISC by Jan. 31.
Before you file your taxes, talk to your tax advisor about these tax tips for landlords. Then, spend some time making sure you’re taking advantage of all the deductions available to you.