Owning rental property comes with many benefits, including tax benefits. As a landlord, you should be aware of the many property expenses you can deduct from your taxes so you can maximize your rental profits.
Not deducting qualified business expenses is leaving money on the table. So here are the top five tax deductions you need to know as a landlord:
1. Mortgage interest
If you have a mortgage on your rental property, you can deduct your mortgage interest. Why? The IRS considers it a business expense.
For occupant-owners, the mortgage interest deduction is limited to mortgage debt of up to $750,000, but there’s no limit for rental property owners.
As a rental property owner, you’ll report your mortgage interest as an expense on Schedule E of Form 1040 (or on a partnership or corporate tax form). Your mortgage lender should send you a Form 1098 that shows exactly how much mortgage interest you paid that year to make this easier.
2. Property depreciation
You can also deduct the depreciation of your rental property. Again, this is considered a cost of business.
However, this deduction only applies to the property itself, which depreciates through wear and tear. The land is not depreciable since it’s never used up in the same way.
The IRS has you calculate property depreciation on a 27.5-year schedule, what it considers the “useful life” of the property. This means you deduct the value of the property at the time you bought it over the course of 27.5 years (i.e. 1/27.5th of the property’s cost each year).
You can also deduct the depreciation of certain large expenditures like appliances or furniture, but you must do this separately.
3. Property taxes
Every state taxes property, and some have a higher property tax rate than others. What you pay in property taxes will depend on where the property is located and how much tax assessors think it’s worth.
As a rental property owner, you can deduct all of your property taxes, while owner-occupants can only deduct up to $10,000 worth of property taxes.
4. Repairs
The IRS also lets you deduct any repairs you perform on your rental property. What counts as a repair? Anything that was broken that you needed to fix or replace.
What doesn’t count as a repair are improvements and renovations. So don’t try to deduct these as such. Instead, you should deduct them as a capital improvement.
5. Other operating expenses
Lastly, there’s a slew of property operating expenses you can deduct:
- The cost of hiring a property manager
- Advertising and marketing costs
- Rental maintenance, including cleaning, lawn care, painting, carpet cleaning, etc.
- Homeowner association (HOA) dues
- Utilities (if you pay them, of course)
- Travel expenses incurred from collecting rent or inspecting units (The travel must be ordinary and necessary to your rental business and not related to personal travel to be deductible.)
- Losses from theft or natural disasters (e.g. hurricanes, earthquakes, floods)
- Landlord homeowner insurance
- Home office expenses
- Employees and independent contractors
That’s not an exhaustive list of landlord operating costs, but it’s a good place to start!
Adding it all up
As you can see, there are many rental property expenses you can deduct. So keep good records throughout the year and consult a tax professional when it comes time to file your taxes. They can give you further insights into where you can get tax breaks so that you can minimize your tax burden. As a result, it can actually be cheaper to hire one than not to!