So what do you do if your are among those landlords who are finding it difficult to rent, or who rent, but with a significant cut in the profit margin because they have to sweeten the pot with incentives like a month’s free rent or a reduced security deposit?
You can raise rents, but ultimately that move may leave you with more vacancies. There is a strategy you can use to boost that bottom line, that won’t backfire in the long run. You need to make sure you’re maximizing your tax deductions.
The key to getting the most bang for the buck from your deductions is keeping comprehensive records, says real estate and tax attorney Robert D. Lattas. Robert also based his comments on his experiences as a landlord. Good records make it easy to see all the deductions you are entitled to take, and taking every one you’re permitted allows you to significantly lower your taxable income for the year.
There are a number of deductions Robert itemized that every landlord should be sure they include when they file their federal return:
- Interest you pay on your mortgage/building loans
- Real estate taxes you pay to the county
- Maintenance costs for the upkeep of the property
- Gas and electric bills for common areas
- Insurance costs
- Maintenance, oil and gas for vehicles used by your maintenance person(s)
- Building manager’s salary
- Condo association fees
There are two important caveats Robert noted when it somes to deductions. The first is that you cannot deduct for vacancies, even if they are long term. However, he went on to explain that since landlords are required to report all income earned from rents each month, having a long term vacancy will lower the amount of income you will report, which lowers your taxable income.
The second is that you cannot take deductions for work done on your personal residence. Deductions must be associated with the upkeep of the building.
In addition to deductions, there are depreciable expenses you can claim. Almost all capital assets are depreciable. Robert explained it in this way, “When you buy a building new, in ten years it won’t be worth nearly the same. The building loses its value over the years. That’s depreciation.”
Besides the building, which is undoubtedly a landlord’s biggest asset, there are other capital assets like washer/dryers that are in common areas, computers, and furniture and equipment in your office in the building. Another important caveat to remember is that land, although it is an asset, is never depreciable.
The IRS code is very specific when it comes to taking depreciation. It spells out the useful life for all assets. It also requires that the depreciation deduction must be evenly spread out over the useful life of the asset, and that a portion of that depreciation must be taken each year. If a landlord fails to take a depreciation deduction for an asset in one tax year, they cannot double up the following year. That deduction is lost forever. Landlords must also be sure that they have receipts to prove how much they paid for the asset to substantiate the deduction.
Robert added to be sure to deduct expenses that you pay that may not be typically associated with owning a building. For example, if your building has a pool for common use, the expenses associated with the pool’s upkeep are deductible. Some jurisdictions require landlords to pay water bills, these are also deductible. And if you live in a county that requires landlords to buy special permits each year, the fees paid for the permits are deductible.
Although some of these expenditures may be small, when added with all of the other deductions, they go along way in reducing the amount of taxable income you have to report to the IRS. And as Robert says, “As much as we love this country, nobody wants to pay more taxes to the government than they have to.”