Tax season is here again, so it’s an ideal time to review several important tax breaks that you could be overlooking with your rental housing properties. Here’s a look at some common tax deductions you may be able to take advantage of this tax season; please note that this is for informational purposes only and is not intended as financial advice. For more information on how these tax breaks can be applied to your rental properties, please consult with a tax advisor.
- Repairs & Maintenance
In general, anything you do to maintain your rental properties and keep them in good condition and livable is tax-deductible. This includes things like appliance repair, fixing a broken window, pool cleaning, or pest control. You can also deduct the money you’ve spent on equipment to maintain the property, like lawnmowers or chainsaws.
The costs of the supplies needed to complete repairs are also deductible. This includes things like door handles, shelving, light fixtures, plumbing supplies, and labor costs. Rental fees for tools or equipment needed for repairs count as well. In addition, if there’s anything that makes the property uninhabitable for any reason and the tenant needs to stay in a motel while the issue gets resolved, the hotel fees would also be tax-deductible because they are considered to be a part of the repair process. Deductible repairs are essentially anything you need to do to the property to get it back to livable, working condition.
- Advertising
Most business expenses are tax-deductible, including advertising. Regardless of whether you choose to advertise on the radio, television, or the web, you’ll be able to write it off on your taxes. Make sure to keep all your receipts, just in case of an audit. It’s also important to save your receipts to ensure you’re taking advantage of all your deductions and providing accurate information on your taxes.
One thing to keep in mind is that word of mouth is also a form of (free) advertising, however, you can’t deduct the time you’ve spent talking to people about your property. For example, you can’t write off a lunch where you discussed your property with some friends. Although most landlords wouldn’t think to do this, some might consider it. Be careful and accurate about your advertising deductions and ask a tax advisor if you’re unclear on what falls under tax-deductible advertising.
- Property upgrades
In contrast to repairs, upgrades are anything that adds or increases the value of your property. This includes things like adding a screened-in porch or installing new cabinetry or countertops. Upgrades are usually more labor-intensive and cost more than general repairs or maintenance, and the assumption is that the improvements will add value to the property over many years, not just the current year. For this reason, you can deduct a percentage of the costs of upgrades during the year they’re performed, but not all of them. Depending on the type of upgrade you make, you may also be able to deduct depreciation on your taxes over the course of several years.
Tax credit amounts can be very specific, which can make it difficult to distinguish some types of improvements from repairs. For example, replacing older windows is a bit of a gray area, and whether or not that would be tax-deductible depends on the age of the windows and the type of windows you’ll be replacing them with.
- Services and commissions
Any fees you pay property managers, attorneys, or other professional services that are specifically related to your property are considered business expenses and therefore tax-deductible. Other fees that would fall into this category are fees from tax accountants, real estate agents, notaries, and investment portfolio managers.
- Insurance
Almost all insurance premiums you pay for your rental property are tax-deductible, including fire, theft, flood insurance, and landlord liability insurance. If you have employees, you can also deduct the cost of their healthcare and worker’s compensation insurance.
- Mortgage interest
If you’re paying a mortgage on your rental property you’ll have to pay interest on it, however, the interest for those payments is tax-deductible as a business expense. Although there’s a yearly limit to how much you can deduct, you’ll want to make sure you can deduct the maximum amount you’re entitled to. Other items you can deduct are points or prepaid interest that you paid when you first took out the loan.
- Pass-through deduction
As of 2018, most landlords qualify for the pass-through deduction established by the Tax Cuts and Jobs Act. This is a special income tax deduction that’s set to expire in 2025, rather than a rental deduction. Depending on your income, you may be able to deduct up to 20% of your net rental income OR 2.5% of the initial cost of the property plus 25% of the amount you pay any employees.
- Travel expenses
Landlords can deduct most of the driving they do for rental activities. This would include driving to the property for maintenance or going to the hardware store for repair supplies. However, travel for improvements cannot be deducted – these types of travel expenses must be added to the property’s tax basis and depreciated over years, like the improvements themselves.
If you drive your own vehicle for rental activities, you have two options for deducting expenses. You can deduct the actual expenses like gasoline, upkeep, and repairs, or use the standard mileage rate provided by the IRS. However, to qualify for the standard mileage rate, you have to use it in the first year you used your vehicle for rental activities.
If you need to travel overnight for rental activities (for example, if your property is in another state), you can deduct airfare, hotel bills, meals, and other travel-related expenses. However, be aware that auditors pay close attention to overnight travel deductions because many taxpayers claim them without providing records to prove they’re valid. If you do any overnight travel, make sure you keep good records and all your receipts in case of an audit.
Knowing what you can deduct with your rental properties ensures you get all the tax breaks you’re entitled to and helps recoup the cost of many common expenses throughout the year. Make sure to do the proper research and to reach out to a tax advisor if you’re uncertain if a particular tax break applies to your properties.
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