Death and taxes may be unavoidable, but as a landlord, you can avoid paying more than you have to by taking the right deductions.
Here are five deductions that are easy to forget.
If you're a landlord who doesn't live near your rental property, you can definitely benefit from the travel deduction.
This deduction allows you to claim all rental related errands on your taxes. For example, if you need to make a trip to inspect the property, check the smoke detectors, make a repair, or discuss something in person with your property manager or tenants, you can claim either the distance traveled or the actual costs of travel.
If you choose to claim the actual expenses, that involves keeping track of how much was spent on gas and car maintenance (or plane tickets, car rentals, and hotels if you live farther away) for rental related activities. If you choose to claim the standard mileage rate, you earn a fixed amount based on miles traveled.
In 2018, the rate was 54.5 cents per mile, but the rate changes each year. Be sure to check the IRS website for the most up to date information.
In order to successfully claim the travel deduction for driving, it’s helpful to keep a mileage log where you note the miles driven, the reason for the trip, and the date the trip was taken. For flights, you can record the dates, the reason for the trip, and the cost of the tickets.
Even for landlords who have enough funds to pay for a property in cash, most opt to take out a mortgage to free up funds for a future down payment on an additional property. Although interest rates will vary, you can still deduct the interest you pay throughout your mortgage.
This deduction includes loans you receive to obtain or improve a property, or interest on credit cards and other personal loans if the money is being used for rental related expenses.
Some requirements to note: you can’t deduct principal payments you make, only the interest. You can’t deduct interest paid through a second loan. Also, any expenses paid to obtain the mortgage (including fees and commissions) don’t count as interest.
Repairs and Improvements
The good thing about repairs is that the entire cost of the repair is deductible that same year. The tricky part lies in understanding the difference between a repair and an improvement.
Unlike repairs, improvements cannot be deducted all in one year; rather, they must depreciate over the course of several years, with the specific time period depending on the type of improvement.
So what’s the difference between a repair and an improvement?
A repair is generally something you do to keep the property habitable and in working order. These are sometimes referred to as operating expenses, which could include:
- Unclogging a drain
- Patching a section of roof
- Buying a new part to fix the washing machine
- Replacing a section of cracked tile
Repairs are not usually big-ticket items, but the everyday parts and purchases made to keep things running smoothly.
An improvement is an upgrade that has lasting value and extends the life of the property. Sometimes these are called capital expenses, which could include:
- Replacing the entire roof with a higher quality shingle
- Buying a new washing machine
- Replacing the carpet in an entire room
- Remodeling the kitchen
Since improvements will typically outlast a single year and add significant value to the property, they cannot be claimed all at once, but the cost must be spread out over several years. The amount of time depends on the asset, and it can encompass a wide range. For example, appliances, carpets, and furniture depreciate over five years, while the property itself, the plumbing, and the electrical systems depreciate over 27.5 years. The land on which a unit is built never depreciates, since it can be used repeatedly for building.
To sum up, repairs keep things working and are 100% deductible that same year, while improvements are upgrades where the cost is deductible over several years.
If you want to make sure what you’re doing is a repair and not an improvement, be sure to be cautious about making outright replacements if they’re not necessary. Patch and mend whenever possible, and keep good records about what was included in the repair and why it was called for.
Employees and Independent Contractors
If you’ve hired a property manager to take care of your rental or if you employ a handyman to fix things, then you can deduct their wages as a business expense. This category can also extend to housecleaners, gardeners, pool cleaners, and any other type of independent contractor you enlist to keep your property running.
If you pay an employee or independent contractor more than $600 in a single year, the IRS asks you to submit their tax ID number and the amount you paid on Form 1099-MISC.
Having insurance on your rental property is a smart decision. Whether you’re protecting yourself from a fire, flooding, a tenant’s damage, or any accidents that may occur on your property, you should be sure your policy covers you where it counts.
Usually homeowners insurance covers someone’s primary residence. Obtaining insurance for a rental property is often more expensive than a homeowners policy, since rentals are treated as a business. However, any premiums you pay on rental related insurance can be deducted. If you’re a landlord with full-time employees, you can also deduct the cost of their health insurance.
Taxes don’t have to be overwhelming. And as a landlord, it makes good business sense to take advantage of the deductions already available to you. The key to being able to successfully claim any deduction is having a rock-solid system to keep everything organized. How can a landlord expect to deduct travel if they aren’t sure of the miles they drove? How can they deduct repairs if they constantly lose receipts?
Organization is a great goal, but without a system and tools in place, it can easily fall flat. It’s worth taking a few minutes to decide what’s going to work for you. What will you do once you get a receipt? How are you keeping track of interest paid on your mortgages?
Whether you’re using Excel, QuickBooks, or a free property management software like Tellus, putting in a little work now can save a lot of time and money later.