Tax season can be challenging and intimidating as a landlord, but there are many ways you can save money and ease your financial burden. Tax deductions, in particular, are an important way landlords can reduce their tax liability and maximize the ROI on their real estate investments. These potential savings are especially important given the rising interest rates and increasing property tax rates across much of the country in recent years — not to mention historic inflation levels affecting everything from maintenance to improvements. This article will explore the most common rental property tax deductions to help landlords combat increasing property ownership and management costs.
Rental property owners incur significant expenses maintaining and managing their properties. Luckily, many of these costs are tax-deductible, meaning landlords can subtract qualified expenses from their adjusted gross income to reduce their tax liabilities.
Real estate purchases require a significant initial cash outlay from investors. As a result, many investors choose to finance their investments with mortgages — a large loan that usually incurs significant interest charges. This interest can be deducted from taxable income and is a common deduction used by rental property owners. Indeed, the mortgage interest deduction is one of the biggest deductions that property owners qualify for.
Landlords have a vested interest in keeping their rental properties in top shape to encourage renewals, maintain their property value, and attract new tenants when needed. Maintaining a property and paying for repairs can be expensive, but these costs can also be deducted from a landlord’s final taxable income. Cleaning, fixing a plumbing issue, replacing windows, repairing the roof, and repainting are all considered tax-deductible maintenance costs.
Like any asset, property depreciates over time and the amount of this loss should always be included in tax deductions. Amortization is the consideration of this loss in value, which takes place gradually over the period of ownership. Annual deductions can track a property’s loss in value over time by spreading the cost of buying a property over years.
In addition to these direct deductions, landlords can undertake a cost segregation study, which accounts for the depreciation of assets such as driveways, climate control systems, and other fixtures to further reduce their tax bills.
From wildfire insurance to personal liability policies, rental property owners need to be covered in a variety of ways. The premiums associated with each of these insurance policies are essential — but their costs add up. However, the costs of these necessary premiums can be further justified when writing them off as business expenses during tax season.
Even in the early stages of owning a rental property, investors often hire employees or independent contractors — from real estate agents to cleaning services to property managers. Over the course of ownership, landlords pay other contractors such as electricians, plumbers, and other maintenance workers. In addition to wages, any expenses incurred for employees, such as equipment, travel, and benefits, are also tax deductible.
Owning, maintaining, and renting properties can become a significant administrative undertaking for landlords, who often turn to professionals for their legal and accounting needs. Property owners should know that the costs associated with paying lawyers and accountants to help with their rental business are deductible, as are any costs for specialized software to meet these needs.
Landlords often have to advertise their rental property to reach potential tenants. There are many forms of advertising that rental property owners can employ to increase their reach, ranging from online platforms to traditional newspaper advertisements. Any expenses related to these marketing efforts can then be used as tax deductions.
This particular tax deduction is often used by short-term rental property owners where the tenants are not expected to pay for utilities, or by long-term rental property owners during vacancy periods. If a landlord is expected to pay for utilities for their rental property, the amount paid can be deducted from their taxable income.
Landlords who own rental properties in different states often have to travel to check up on properties and meet with tenants. These travel expenses are deductible regardless of the method of travel, from gas to plane tickets.
The Tax Cuts and Jobs Act (TCJA) is a relatively new law that has lowered average tax rates across all income groups in the United States. The law allows rental property owners to use the qualified business income (QBI) deduction to reduce their tax bill by 20%. However, the Biden administration is actively attempting to pass tax reforms that could affect rental property owners’ ability to use this deduction. Landlords should use this deduction to reduce their tax liability while they still can.
The above deductions can help rental property owners reduce the pinch they feel during tax season. For many landlords, the extent to which they can turn a profit on their investment depends on how effectively they navigate and manage their tax responsibilities. These increased profits can then be used to improve the quality of the rental property or finance further investment in new properties.
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