10 Tax Deductions Often Overlooked by Landlords
Owning rental property isn’t always easy, but there are some serious tax advantages that come along with being a landlord. Yet surprisingly, most landlords don’t take full advantage of these tax benefits. Most write off standard tax deductions like mortgage interest, insurance and ordinary maintenance and repairs – and understandably, as these are the heavy hitters.
But there are a number of other tax deductions that rental property owners either miss or don’t know about. Here are 10 tax deductions that are often overlooked by landlords.
- Business startup costs.
If you’re just starting your rental property business, you might be able to deduct a portion of your startup costs. Common startup costs include accounting fees, the study of potential markets, training for new employees, office equipment and furniture, and salaries. Although most startup costs are considered capital expenditures, you may be able to deduct up to $5,000 of those costs if your total startup costs exceed $50,000. The remaining costs must be amortized over a period of time.
- Costs incurred while looking for new property.
The costs of your hotel, airfare, rental car, meals and other travel expenses incurred while looking for a new rental property are fully tax deductible if they are ordinary and necessary. To qualify, at least half of the time you spent away on travel must have been spent on doing business, and the primary reason for travel must be for business. Technically, this means you could write off a long weekend in Florida as long as you spend the majority of time engaging in business-related activities.
- Ordinary and necessary advertising expenses.
Landlords can write off any costs incurred while advertising their business (generally) and/or a rental unit (specifically). Common expenses include classified ads, signs and postage for mailers. You can even deduct the costs of building a new website.
- Utilities paid by the landlord.
It’s common for landlords to pay for common area lighting and security systems. But did you know that landlords can also write off expenses like heating, water, sewer, gas, trash collection, cable and internet? The costs of utilities used by tenants are fully deductible, even if the tenants reimburse you later—just be sure to claim those reimbursements as income.
- Pay your kids to help with property maintenance.
This is one of the oldest tricks in the book. If it looks like you’re going to have a large tax liability at the end of the year, put those children of yours to work! “Hire” your kids to help with property maintenance. Have them mow lawns, shovel snow, and clean vacant units. Keep a written receipt detailing how much you paid them, for what activities, and when (just as you would when hiring any contractor). Not only will this help reduce your tax liability, but it will introduce your children to the world of real estate and property management.
- Property management fees.
No kids to put to work? No problem. You can still reduce your tax liability by deducting property management fees. Property management fees are considered administrative expenses and can be written off in full. If you self-manage your rental properties, don’t forget to write off the costs of ordinary maintenance, screening prospective tenants (e.g. background and credit checks), and advertising (see above).
- Interest paid on loans or credit cards.
Most landlords won’t overlook writing off their mortgage interest, but they’ll often forget to write off interest paid on other loans or credit cards. If the loan or credit card was used to buy, maintain or repair something at your rental property, you can deduct the interest paid. Be careful not to co-mingle business expenses on a card with personal expenses, as interest paid on credit cards for personal items does not qualify.
- Home office or workshop.
Claiming a home office or workshop is a bit of a grey area, and for that reason, many landlords opt to steer clear of this tax deduction. But this deduction can be highly valuable, so it’s worth looking into. Office furniture, tools, and a portion of other expenses – like utilities and home maintenance – might also qualify as write-offs. Before claiming this deduction, we suggest talking with your accountant to be sure you understand the minimum requirements that make these spaces eligible for write off.
- Selling the property to your own S-Corp.
In rare circumstances, it might make sense to sell your rental property back to yourself through the creation of an S-Corporation. For instance, selling a property to your own S-Corp may allow you to shield the appreciate value through capital gains protection. Here’s an example: You purchased a property in 2005 and made significant improvements to the property before moving out in 2009. You’ve rented ever since. If you go to sell the home now, the appreciated value is subject to capital gains tax because you haven’t lived in the property as a primary residence for two of the last five years (the notorious “two-year” rule). Instead, if you had sold the property to your own S-Corp sometime between 2009 and 2012, you could have excluded capital gains (up to $250,000 or $500,000 if married and filing jointly) because the requirements for the two-year rule would have been met. Selling to an S-Corp can be complicated and shouldn’t be used by everyone. Consult with a tax advisor before deciding to go this route.
- Depreciate more than the standard 1/27.5 years.
When you purchase rental property, you’re really buying multiple assets: land the building sits on, improvements to the land such as landscaping, the building itself, and any property included with the sale (such as appliances). Most landlords depreciate all of these items together over the standard 27.5-year recovery period. But each asset can be depreciated separately (except land — land is not depreciable at all). This depreciation method, known as “cost segregation,” is more complicated, but it allows landlords to accelerate depreciation because land improvements and personal property have shorter depreciation periods than real property, usually between five and seven years. Your total depreciation won’t be different, but cost segregation gives you a larger depreciable deduction during the first several years you own the property. Every rental property owner should consider having a validated accounting firm perform a cost segregation study to determine whether this approach can save you money.
If you own rental property, you should always be looking for ways to maximize the return on your investment. Increasing cash flow is one strategy. Reducing expenses is another. Taking these valuable tax deductions is a great way to shield income earned as a landlord.
Time’s a tickin’! The IRS filing deadline is just a month away (April 15th). Schedule a meeting with your accountant or tax attorney ASAP to be sure you’re taking full advantage of all possible deductions.