For many property inventors, the thrill of purchasing rental units comes with the monetary benefits of owning real estate. For others, it’s all about the pride of ownership. Whatever your reasons are for investing in rental properties, there’s one thing that you have in common with all other landlords: you want your investment to be profitable.
One way to minimize your expenses is by knowing which tax deductions are available to you. You’ll want to take advantage of all of these tax breaks — after all, who wants to pay in full when they could pay even a dollar less?
Tax deductions are unique to each rental property, so it’s best to go through each one. Below, we’ve compiled 8 tax deductions that you’ll want to keep in mind when tax season comes. If you have a property manager or accountant, they can help determine which of these applies to your situation.
#1 Travel Expenses
The money you spend traveling to and from your rental property is deductible. If you’re managing out-of-state rental properties and have to spend hundreds of dollars to fly out to your rental several times a month, the expenses for airfare, car mileage, and hotel costs can be deducted.
Travel expenses can also be deducted even if you don’t live thousands of miles away. As long as you have to travel to your rental unit to collect rent, conduct maintenance, show the property to potential tenants, etc., you have the option to deduct the expenses from your taxes.
#2 Mortgage Interest
Mortgage interest is the largest tax deduction that you can claim. If you purchased your rental property on a loan, chances are, you’re still paying interest to your bank. As a landlord, you can deduct the mortgage interest from your tax since it is considered a rental expense.
Each year, your mortgage company should send you Form 1098 which details the total amount of interest you’ve paid throughout the year. This amount is deductible from your annual tax return. You should report this deductible amount on Schedule E.
#3 Legal Fees
If you consulted a lawyer regarding tenant-related issues, such as violation of the lease agreement, you can deduct the money spent on legal services from your tax. Similarly, if you had to evict a tenant, you can also deduct attorney’s fees and other eviction-related costs including filing paperwork in court.
However, although legal fees are deductible, it would still be ideal to avoid taking legal action. The eviction process can be tiring and tedious — it would be better to prevent leasing the unit to unqualified tenants in the first place. Hiring property managers is an excellent way to ensure that an applicant’s criminal history, credit score, employment status, etc. meet certain standards.
#4 Office Space
Because owning a rental property demands plenty of time, many landlords have an office space in their primary residence that they use to conduct rental-related business. Expenses associated with maintaining an office space are actually deductible from your taxes. This includes costs for printers, phone lines, computers, ink, and many more. The total square footage of the office space can also be deducted.
Keep in mind that the equipment and resources must be used solely for your rental business. For instance, your laptop shouldn’t be used to play video games.
#5 Expenses Related to Independent Contractors
Whenever you hire an electrician, plumber, landscaper, carpet layer, and others, you can deduct their wages from your taxes. This deduction also applies to full-time employees (e.g. a residential concierge) or an independent contractor (e.g. a handyman) that you hire for a one-time job, such as fixing the roof.
Independent Contractors (ICs) also include real estate brokers, real estate appraisers, architects, lawyers, bookkeepers, accountants, and property managers.
#6 Property Repair Expenses
Many rental property owners assume that any home improvement conducted on their property can be considered a deductible expense. Not quite.
It’s important to note that only repairs can be deductible. This includes necessary upgrades such as repairing windows, fixing broken handrails, replacing light switches, and so on. On the other hand, improvements, which are not deductible, usually include aesthetic upgrades. In other words, improvements are property upgrades that aren’t necessary. This includes adding a deck, new landscaping, etc.
#7 Advertising Expenses
Marketing your rental property is essential if you want to fill vacancies fast. During the year, you might have paid for physical and digital ad spaces to reach prospective tenants. The good news is that this qualifies as a deductible expense. You can deduct all expenses related to newspaper ads, digital ads, radio ads, and television ads. Fees that you paid to a real estate agent to locate prospective tenants can also be deducted from your taxes.
#8 Casualty Losses
If your property suffers from an unforeseeable event, such as a fire, earthquake, flood, and other natural disasters, you can claim partial or total property loss on your next tax return. However, the deductible amount depends on your insurance policy. If your insurance already covers part of the losses, you can only deduct the losses that aren’t covered. For example, if your insurance policy does not cover flood-related damage, you can still claim this tax deduction.
Where Should You Report Your Tax Deductions?
You can claim your tax deductions for a specific year when you file your tax returns on the following year. You will have to complete the Internal Revenue Service (IRS)’s Form 1040 Schedule E form to detail the expenses that you can deduct. If you’re planning on deducting segmented depreciation, be sure to have Form 4562 at the ready.
Be sure to back up your claims with accurate records of all of the expenses. This includes invoices and receipts for repairs and maintenance, as well as other pertinent documents related to your mortgage, legal fees, and more.
All in all, there are several deductions that you can claim as a rental property investor. It pays to know expenses you qualify for so that you can reduce your total payable taxes for the year.
Luxury Property Care offers landlords the assistance they need in figuring out how tax deductions work. We have a team of skilled accountants and property managers who will oversee all of your expenses and handle your taxes during tax season.
The best part? Hiring a property management firm is deductible.