Key Tax Deductions for Landlords
It’s tax time again, and many Americans are busy preparing their records, receipts and documents in an effort to file.
While many investments, including stocks and bonds, are subject to taxes above and beyond simple income tax, rental property ownership, on the other hand, can deliver some compelling tax breaks for landlords. Of course tax benefits alone are no reason to run out and buy rental properties, they’re worth considering when researching investment options and important for landlords to track.
Rental property often offers larger deductions and tax benefits than many other investments because the IRS allows you to deduct expenses you pay. This includes maintenance, conversation, management and other expenses deemed necessary and associated with property rental. Often, these benefits can make the difference between losing money and earning a profit on your rental property. To help clients, prospects and others understand these tax deductions and benefits; Hanson & Company has provided a brief summary of the key deductions below:
- Interest – Mortgage interest is usually the single largest deduction landlords can take, but it’s not the only type of interest deduction. You can also deduct home improvement loan interest and even credit card interest for property-related expenses.
- Depreciation – 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, but you can deduct a portion of the structure’s cost each year as depreciation (the value of the land is not depreciable).
- Repairs – 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. Examples of deductible repairs include: repainting, fixing gutters or floors, fixing leaks, plastering, and repairing windows.
- Local Travel – As long as the travel was related to rental property activity, both local and long distance count toward this deduction. Typical travel expenses might including meeting a prospective tenant for a showing, driving around to conduct market research or checking out homes for purchase, and trips to the hardware store for materials
- Long Distance Travel – 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. Just be sure to document your travel expenses carefully because IRS auditors closely scrutinize deductions for overnight travel, and many taxpayers get caught claiming these deductions without proper records to back them up.
- Employees and Independent Contractors – If you hire anyone to perform services for your rental, you can deduct their wages as a rental business expense. This applies whether the worker is an employee (for example, a resident manager) or an independent contractor (for example, a repair person).
- Casualty and Theft Losses – If your rental property is damaged or destroyed from a sudden event like a fire or flood, you may be able to obtain a tax deduction for all or part of your loss. How much you may deduct depends on how much of your property was destroyed and whether the loss was covered by insurance.
- Insurance – You investment must be insured, and if it’s mortgaged, your lender will require it. Your insurance premiums are deductible, and this includes liability, casualty and any other insurance related to the rental property. And if you have employees, you can deduct the cost of their health and workers' compensation insurance as well.
- Legal and Professional Service Fees – Finally, you can deduct fees that you pay to attorneys, accountants, property management companies, real estate investment advisors, and other professionals. They can be deducted as operating expenses as long as the fees are paid for work related to your rental activity.
If you were not aware of one or more of these deductions, you could be paying far more in taxes than you need to. Rental property tax breaks can add up to big savings when filing your annual returns and make your investment even more profitable. If you have questions about any of these tax deductions or are unsure how to properly account for these on your 2014 tax return, Hanson & Company would like to help. Contact us at (303) 388-1010 or click here for email to take advantage of these beneficial deductions