It is important for landlords to understand the various tax write-offs available to them. Most of the expenses associated with property management can be deducted, because managing investment property is a valid business. Here are six tax deductions for landlords to keep in mind.
1. Interest
Landlords can write off mortgage interest on investment properties, but may also write off any interest incurred — this includes credit cards, lines of credit, and other loans used to acquire, improve, or perform activities related to the property. For example, if you hosted a party for residents this year and paid for it with your business credit card, you may write off that interest.
2. Depreciation
The IRS considers residential real estate to be a depreciating asset. The building’s “useful” life is 27.5 years. This means you can write off a 1/27th of the building each year. In order to do that, you must separate out the value of the building from the value of the land. Your tax assessor’s database may help to give you an idea of the value of each of those components. You may also consider an appraisal or an insurance agent’s cost estimate of the building.
You may also want to consider doing a cost segregation study,which allows you to accelerate depreciation for some aspects of the property ahead of others. For instance, personal property such as furniture, carpets, fixtures, window treatments, and appliances depriciate over a 5-year or 7-year period. Land improvements such as sidewalks, paving, fences, and landscaping, can usually be depreciated over a 15-year period. The remainder of the building is depreciated over the full 27.5-year period.
3. Travel
Travel related to the property can be written off on your taxes. For example, if you drive to a hardware store for supplies, that trip can be written off. Investors can also write off travel related to searching for a potential investment property, such as a trip needed to evaluate an out-of-state opportunity. There are some restrictions: at least half of the time spent on that trip must be related to evaluating the investment opportunity, so be sure to keep detailed records that log your travel expenses.
4. Employees & Contractors
Payments for services related to your property can be deducted as a business expense. This may include landscaping, housekeeping, etc, so you’ll want to keep receipts. This is true for both landlords and homeowners associations.
5. Legal & Professional Services
Landlords, property managers, and homeowners associations can write off professional services incurred in the course of running the business. This includes any fees paid to your attorney, accountant, management company, and investment advisors. These are considered operational expenses, and are a requisite part of doing business. Be sure to write them off accordingly.
6. Marketing Expenses
Websites, signs, and other marketing expenses can be deducted on your taxes. Any advertising, whether for your business or for a specific property, can be written off as a business expense. This includes ads placed in newspapers, postage for mailers, or even the fee you paid to participate in a local real estate development panel.
Hired Help
You may want to consider hiring an accountant to make sure that you’re taking advantage of all the tax deductions that are available to you. Make sure you have the proper receipts, bank statements, and documentation to support these write-offs.
If you struggle to track your expenses, you may want to consider hiring a property manager. An experienced property manager should be able to systematize the process for you so that each year, you fly through tax season with ease.