Rental Investor Starter Kit

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Owning rental property isn't always easy, but there are some serious tax advantages that come along with being a landlord. Surprisingly, most landlords don't take full advantage of these tax benefits when filing their tax returns. 

Most write off standard tax deductions like mortgage interest, insurance, and ordinary maintenance and repairs - understandably, as these are the heavy hitters. But there are many other tax deductions that rental property owners either miss or don't know about.

Rental property tax deductions often overlooked

Here are  rental property tax deductions that are often overlooked by landlords:

1. 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.

2. 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 get a tax break for a long weekend in Florida as long as you spend the majority of time engaging in business-related activities.

3. Ordinary and Necessary Advertising Expenses

Landlords can write off any costs incurred while advertising their business and/or a rental unit. Typical expenses include classified ads, signs, and postage for mailers. You can even deduct the costs of building a new website.

4. Meals and Entertainment

After the Tax Cuts and Jobs Act (TCJA) of 2017, there are fewer deductions for meals and entertainment available, and the deductions for meals and entertainment is capped at 50%. To make the deduction, meals, and entertainment have to be directly related or associated with running a business in your industry, the taxpayer has to be there, and the amount can’t be lavish or extravagant.

 Examples include:

  • Catering office meetings.
  • Meals eaten on business trips and at conventions, conferences, or seminars.
  • Meals provided for the convenience of the employer on the employer’s premises.
  • Office snacks, water, and coffee.
  • Meals provided along with charitable event tickets.

These deductions are set to fully expire by 2025 unless Congress passes a law that says otherwise. You can still get a 100% deduction on all recreational or social employee events so long as they're open to everyone and don't discriminate based on employee compensation.

5. Suspended Passive Activity Losses

Real estate professionals can write off rental loss and business losses against any income they earn. That includes income lost to unpaid rent. Until 2025, there's a cap of $250,000 if they are single and $500,000 if they are married filing jointly. That cap goes away after 2025.

Rental property losses that aren’t deducted right away are called “suspended passive losses.” These losses are carried forward indefinitely until one of two things happens:

  • You have passive income (from a rental home or otherwise) to deduct again, or
  • You sell or transfer the property.

You can deduct the suspended losses when you sell your property, but only if the property is treated as a single activity for tax purposes. Many landlords treat one or more of their properties as a single activity, which would mean that selling just one property would not allow you to deduct those suspended losses. 

Finally, the sale must be made to an unrelated property and treated as a taxable event. 1031 exchanges do not count. Foreclosures are eligible. 

6. Utilities Paid By The Landlord

Landlords often 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 your renter reimburses you later--just be sure to claim those reimbursements as income.

7. 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. Not only will this help reduce your tax liability, but it will introduce your children to the world of real estate and property management.

8. Property Maintenance

Property maintenance, whether frequent or infrequent, are all deductible maintenance expenses.

  • Pest control
  • HVAC servicing
  • Flushing sewage/water lines
  • Landscaping
  • Gutter Cleaning
  • Deep cleaning between rental turnovers
  • Powerwashing

9. Property Management Company 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 ordinary maintenance costs (like yearly fall maintenance), screening prospective tenants, and advertising.

10. HOA Dues

If you belong to a Homeowners Association, you have to pay dues. Since they’re a necessary expense that makes them deductible against your rental income.

11. Legal Fees for an Eviction

One of the real costs of eviction is legal fees. You can deduct court fees and legal fees. 

12. Expenses Paid By Tenant

Any fee that you would pay if you lived in the property covered by your tenant's rent payment is known as an “expense paid by tenant.” You can easily stipulate which fees they may be using a free rental agreement template

For example, a tenant might cover their own HOA dues, which would be deducted from their monthly rent. Just remember that:

  • Expenses paid by the tenant count as rental income since you would be making those payments otherwise.
  • The expenses have to be themselves deductible, like water or sewage.

13. Energy-Efficiency

If you upgrade your property to be more energy-efficient, you might qualify for a partial deduction. For example, replacing an HVAC that's 10-years-old or replacing a 15-year-old water heater. For a list of qualifying upgrades, consult the IRS.

14. Employees

All employees and independent contractors you hire to run your business can be a deduction. That includes:

  • Wages
  • Social Security contributions
  • Health insurance costs
  • Other Benefits.

15. Insurance

You can deduct your rental property insurance, which is 15% to 25% more than homeowners insurance for owner-occupied properties. If you work out of a home office, you can also deduct a part of your primary residence insurance. 

16. Casualty Losses

You can claim a total or partial property loss when filing taxes if your property experienced a fire, natural disaster, or unexpected event. You can only claim a loss if you have insurance. If you have insurance, your casualty loss claim has to be reduced by the amount of compensation you have received or will receive from your insurance. If your loss is 100% covered by insurance, you don’t get a deduction. 

17. Rent for Equipment and Tools

The money you pay for renting equipment and tools is tax-deductible. Example include:

  • Tools used for maintenance
  • Reserving a helium tank for a work event
  • Vehicles

18. Subscriptions and Memberships

  • If you belong to any professional organizations, you can write off your dues.
  • Subscriptions to trade publications (but not general magazines or “waiting room” magazines)
  • Buying or subscribing to software, apps, and online tools you use to run your business.
  • Cloud accounting tools  
  • Productivity apps 
  • Cloud storage 
  • Social media management tools 
  • Online shopping carts
  • Stock image services
  • Digital downloads
  • Fonts
  • Stock photos
  • Templates
  • Ebooks

19. Internet and Cell Phone Plans

If you use your internet and cell phone plans for business purposes, you can deduct the percentage you spend on your business. It may be challenging to tease personal and business usage apart. The key is to be reasonable, consistent, and keep records. 

One option is to subtract the estimated number of hours you work per month from the total number of hours you work per month and then use that difference to calculate the percentage of your total internet and phone bills spent on your business. So, if your internet is $100 a month and you work 40 hours a week in September, that’s 160 hours a month out of 720 total possible hours (24 x 30). So, you spent 22% (160 ÷ 720) of $100 on your business, which means you can deduct $22. 

20. Education

Education and training for yourself and your organization can be written off, although there are many stipulations for this one, so be sure to perform your due diligence. A description of the service or item should be enough to make the deduction. 

  • Conferences
  • Coaches
  • Books
  • Webinars
  • Networking events
  • Etc.

21. Interest Paid On Loans Or Credit Cards

Most residential 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 could deduct the interest paid. Be careful not to commingle business expenses on a card with personal expenses, as interest paid on credit cards for individual items does not qualify.

22. Marketplace Fees

Fees paid to use short-term rental services such as Airbnb and HomeAway are entirely deductible. 

23. Petty Cash Expenses 

Petty cash refers to money that's used to pay for small items. Many of the items in this article are petty cash expenses (food, parking, printing documents, etc.). Make sure to keep track of all these petty cash expenses because they're tax-deductible. You can use a logbook, petty cash vouchers, etc., to note the time, date, amount, and what was paid for. Then you can add all these expenses to your bookkeeping system at the end of the month.

24. Travel, Parking, and Tolls

You can deduct the cost of travel if it’s used to make repairs, but if it’s used to make improvements, then it has to be depreciated. To make your calculations, you can use the expenses incurred (gas, repairs, upkeep) or the standard mileage rate, which changes yearly (so confirm it with the IRS).  

If your travel requires staying overnight, you can deduct all the associated costs: airfare, lodging, food, etc. You can even use your trip to have some fun too--like touristy activities--so long as it’s planned in advance. As always, document diligently. 

Parking garages, tolls, and meters can also all be counted so long as you're driving or parking anywhere other than the principal place of business (like your office). If your home office is your principal place of business, you can write off all business parking and tolls. 

25. Home office or Workshop

Claiming a workshop or home office deduction 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.

26. Expenses for Preparing Documents

If you have any documents printed, bound, laminated, shipped, etc., then all of these costs are deductible so long as they are for your businesses. However, you cannot deduct: 

  • Legal fees for buying business assets. You may be able to bundle these with the depreciation of the asset. 
  • Fees for personal work, like funding rental real estate into a trust. If you're invoicing for something that serves both business and personal functions, you have to separate the two out and only deduct the business part.

27. Selling The Property To Your Own S-corp 

In rare circumstances, it might make sense to sell your rental property back to yourself by creating an S-Corporation. For instance, selling a property to your S-Corp may allow you to shield the appreciated 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 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. I

Instead, if you had sold the property to your own S-Corp sometime between 2009 and 2012, you could have excluded capital gains 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.

This is why you should know how to pick the right legal entity for your real estate investment business.

28. Depreciate More Than The Standard 1/27.5 Years

When you purchase a rental property, you're 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. Most landlords depreciate all of these items together over the standard 27.5-year recovery period. But each asset can also be depreciated separately. 

This depreciation method, known as "cost segregation," is more complicated. Still, 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.

29. Repairs

repairs at rental property tax deduction for landlords

An improvement is work that adds value to your rental property. Because the value added by the improvement extends over time, it’s written off yearly as a depreciation. Meanwhile, a repair is anything that allows you to keep operating your property. 

Examples of improvements:

  • Additional dwelling units (ADUs)
  • Adding an AC
  • Renovations
  • New hardwood floors
  • Replacing a roof

Examples of repairs:

  • Updates made to match local code. 
  • Upgrading a sink because the old one broke and the previous model was discontinued. 
  • Patching a hole in the roof is a repair.

Differentiating a repair from an improvement can be tricky. A useful delineation is that improvement adds value to the property while repairs return things to their original condition. 

You can use the BAR acronym to identify if your work is a repair or an improvement.

Betterment: Does it remedy a problem that was around before you purchased your property. Does it physically make the property bigger or better?

Adaptation: Will you be using the property in a way other than how you planned to use it when you first bought the property?

Restoration: Are you restoring the property to like-new condition? Has the damage already cost you money?

If you said yes to any of these questions or your repair is in any of these categories, then the IRS would call it an improvement, and you’d have to depreciate it.

30. Faster Depreciation for Personal Property

You can speed up depreciation for a personalized property using the Modified Accelerated Cost Recovery System (MACRS). It just has to be personal property that’s inside your rental property or property that’s used as part of your rental business. This would be the case if it were

  • Appliances, carpeting, and furniture can be depreciated over five years.
  • Fences and driveways can be depreciated over 15 years.

 Consult the IRS’s list of assets to learn more. 

31. 100% Bonus depreciation and Section 179 deduction

100% bonus depreciation and Section 179 deductions allow you to take your depreciation deduction all at once instead of waiting some predetermined amount of time. The bonus depreciation is 100% only for now.

In 2023, it will begin decreasing 20% every year until 2027, at which point it will no longer exist. Both deductions only apply to specific improvements and purchases. Depreciation recapture applies to 100% bonus depreciation.

Bottom Line on Landlord Tax Deductions

If you own a rental investment property, you should always be looking for ways to maximize your investment return. 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'! 

Tax season has a way of sneaking up on you. Schedule a meeting with your accountant, tax attorney or property manager ASAP to be sure you're taking full advantage of all possible deductions.

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