Tax time is fast approaching, and owning rental properties means more prep work… but also deeper deductions. The required bookkeeping can seem overwhelming at first, but for the average landlord it doesn’t have to keep you up all night. In essence, it just comes down to declaring all of your rental income and claiming every deduction. You can hire an accountant to file your taxes, or do it yourself by completing Schedules C and E (Form 1040).
But which rental property expenses can you claim? According to the IRS: “In most cases, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income.” (Publication 527, Residential Rental Property) These can include expenses incurred for managing your rental, such as legal forms and tenant credit reports and background checks (ahem!). Certain driving and transportation expenses may be deductible.
In many ways, these tax deductions are like the ones you have when running any business. Claiming all of your eligible expenses will minimize your tax bill. Here are some rental property expenses that are commonly overlooked as tax deductions.
Accountant and Lawyer Fees
Many accounting and legal fees are eligible tax deductions. If a lawyer prepares a lease or other legal document related to your rental property, you may claim the cost. Paying an accountant to prepare your tax return is also tax deductible.
Most landlords won’t overlook their mortgage interest, but what about interest paid out on other loans or credit cards? If the loan was used to buy, maintain or repair your rental property, the interest paid is likely tax deductible. Interest from a line of credit may also qualify if the money was used solely for your rentals.
Computers, Phones & Tablets
If you’re a gadget lover, this takes some of the sting out of buying your new toys. Just remember to actually use them to invest in and manage rental properties!
Home office expenses are a bit of a grey area. If you meet certain requirements, and your income property qualifies as a business for tax purposes, you might be able to claim your home office expenses. Items such as supplies or office furniture may be fully deductible. A portion of other expenses, such as rent, utilities and home maintenance may also be claimed. If you would like to start claiming your home office expenses, it’s a good idea to seek professional guidance from an accountant.
Certain travel costs can be claimed as rental property expenses. Trips to maintain your property or to collect rent usually qualify. Careful record keeping is important; track your mileage and keep all of your receipts. Like home office expenses though, these can be an audit trigger, so tread lightly and talk to your accountant before claiming too many travel or home office expenses.
Losses from Theft or Casualty
Anything your insurance company didn’t cover here is tax deductible, so don’t break down in tears if someone steals your rental property’s shrubbery.
Rental Property Depreciation
Claiming depreciation on your rental property is a complex tax matter. Some landlords do it, others don’t. When it comes to rental properties, depreciation “is the mechanism for recovering your cost in an income producing property and must be taken over the expected life of the property.” (Publication 527, Residential Rental Property)
By depreciating your property, you are essentially recuperating some of the initial purchase price with yearly tax deductions. This can significantly lower your tax bill. The disadvantage is that depreciation will be recaptured when you sell your property. In other words, you’ll pay less tax now, but much more in the year you sell. Consult with an accountant to see if rental property depreciation makes sense for you.
Tax Changes for 2014, 2015
In the last few weeks, there have been many government rulings that affect income taxes. As of mid-December, certain tax benefits were extended to include all of 2014. Tax credits for energy-efficient home improvements as well as energy-efficient new home construction will be valid for your 2014 tax return. Other eligible deductions include those for mortgage insurance premiums and mortgage debt forgiveness.
These changes can mean important tax savings for landlords who have qualifying expenses. Currently, these provisions have not been extended to include expenses incurred in 2015. This leaves landlords and homeowners unsure of the best course of action for new updates and repairs, which can be frustrating.
For the full list of extended tax provisions, see the U.S. Congress website.
The Importance of Tax Deductions
Deductions are an important tool for landlords. Tracking all of your rental property expenses and claiming them on your taxes helps to offset your rental income and lower your taxes. Keep good records and all receipts, as the IRS may ask you to back up your claim.
By taking advantage of every tax deduction, you get to keep more of your own money. The refund can then be used however you wish – reducing your investment debts, buying another property, paying for your living expenses or even going on vacation.