The good news is that almost every expense associated with rental properties is deductible. The bad news is that it must be documented, and not all of the deductions are simple.
So, the first step in avoiding a tax season nightmare is to have all proverbial ducks in a row. Every expense should be accounted for, with supporting paperwork saved and organized.
Landlords with four or fewer properties may decide to forego hiring an accountant or tax attorney; however professionals say that is an unwise decision. Real estate tax laws have many nuances and technicalities which could make or break a landlord. Having knowledge of the intricate details or access to them is crucial when it comes to getting the full benefit of being a landlord, and there are many benefits of which landlords will want to take advantage.
Most landlords know at least some of the basic deductions. Here are 14 deductions which landlords can take to ensure their rental properties pay off at tax time, hopefully in addition to paying good cash flow all year long.
1. Depreciation: The IRS allows for the theoretical cost of wear and tear on your rental property(s) to be deducted for a life span of 27.5 yrs.
2. Repairs: All rental properties will require repairs on occasion. Fortunately, repair expenses are deductible.
3. Home Office: Landlords often work from home and can deduct a portion of their mortgage or rent for the space used to conduct their business (warning: home office deductions are allegedly audit triggers, since they are so often abused). In a new simplified rule for 2013, the home office deduction is now $5 per square foot, up to 300 square feet (maximum deduction of $1,500).
4. Travel: Whether traveling across town to make repairs or across the country to check up on your rental property(s), car mileage and some travel expenses (for out of town travel) are deductible. Unfortunately, these expenses are also often abused, making them a likely trigger for an audit when extravagant deductions are claimed.
5. Tenant Screening: The cost of running credit reports, criminal background checks and other background/screening checks on prospective tenants are also deducible.
6. Mortgage Interest: The mortgage interest paid on your rental property(s) is also deductible (but may not be forever, if some Washington lawmakers get their way).
7. Mortgage Insurance: This one actually expired at the end of 2013, and may not be available next year. But for tax year 2013, mortgage insurance premiums paid out each month as part of the mortgage payment are deductible.
8. Property Insurance: Annual premiums to insure rental properties against theft, fire, flood, etc can be deducted.
9. Losses Due to Theft/Casualty: Landlords who experience theft on their property or other casualty may be able to deduct a portion of any expenses not covered by insurance.
10. Professional Services: Professional services such as legal or tax advice from an attorney or accountant are tax deductible. The professional services of real estate agents, property managers, home inspectors, appraisers and the like are deductible as well. This also includes do-it-yourself services (such as, ahem, EZ Landlord Forms accounts).
11. Computers and Cell Phones: It’s next to impossible to manage a rental portfolio without the use of a mobile phone or computer. These tools of the trade can also be deductible when used for business.
12. Settlement Costs: Settlement costs, such as title searches, settlement agent fees, attorney review fees and the like are deductible.
13. Real Estate Taxes: While intuitive, real estate investors should remember to deduct the cost of local real estate taxes, to avoid paying taxes twice.
14. Segmented Depreciation/Cost Segregation: Many landlords are unaware that the IRS allows non-structural assets such as carpets, appliances, etc. to be depreciated over a shorter term (5-15 years) and separately from the line item depreciation of the property itself. This is allowed because the government recognizes that these items will not last as long as the property and therefore, will not fully benefit from the line item depreciation of 27.5 years. Landlords are encouraged to seek the assistance of a professional to utilize segmented depreciation, given the complexities involved. Segmented depreciation may be ill-advised for new landlords.
Careful tax planning throughout the year with the help of a wizard tax professional will bring joy to landlords this tax season… or will at least save them money, which could be used to buy more rental properties (or maybe a much-needed vacation).