Common Tax Deductions for Rental Properties
Yearly property taxes for your rental property can easily be one of your largest expenses, but a good number of the costs associated with the property can be written off as deductions. Keeping receipts and documentation for these costs will not only cover you with the IRS, but will make it easier to calculate totals at the end of the year, and will help you ensure you receive the largest deductions. Utopia Property Management retains this documentation for you and can help with yearly filing.
The most common deductions include:
Interest paid on a mortgage, or loans taken to repair or renovate your property, interest on car loans for business-use vehicles, and credit card interest on items purchased for the rental property together encompass what is generally a landlord’s largest deduction.
Standard repairs needed throughout the course of typical use of the property (such as a broken door or roof shingles) can be deducted in full for the year it was paid, as long as the repair made was lateral. Any change that is considered a betterment, restoration, or adaptation can be partially deducted after depreciation.
Note that commercial properties can deduct costs to make the property energy efficient.
The IRS defines standard repairs as:
“Routine maintenance that keeps your property in a normal efficient operating condition, but that does not materially increase the value or substantially prolong the useful life of the property, is deductible in the year that it is incurred. Otherwise, the cost must be capitalized and depreciated.”
(per IRS Publication 535: https://www.irs.gov/publications/p535 )
Any repair that leaves the property much better than it was before the repair was necessary, restores an item that was not working prior to your ownership of the property, or adds a new function or use to the property, is considered a betterment.
To Repair or Replace?
On some occasions the previous condition of a broken item, or the nature and extent of repairs needed (and/or the possible longevity of repairs that can be made), will make answering this question easy. On other occasions, you’ll need to balance the cost and benefits of each and decide what your best long-term option is.
Let’s say you purchased a property with an 8-year old HVAC system, and it breaks down while the property is rented. You have two options: repair, or replace.
If you repair the item to its standard working condition, the cost can be deducted in full in the same year the repair was made. However, the until will still be old, and now patched, and could become problematic if it continues to have problems in the future.
If you choose to replace the old unit, it will by nature almost certainly be considered an upgrade, and you would not qualify for the entire cost of repair, but instead for a deduction based on the depreciated value of the old unit (which could be zero). While not receiving as large of a (if any) tax deduction, with replacement you will likely improve your current landlord-tenant relationship, and the addition of a new system could give cause to charge a higher rental in the future.
Recommended Documentation to Retain:
– Date damages were reported, and the date the damages occurred.
– Who reported (specific tenant, or note if report was made by 3rd party such as HOA or lawn care service).
– Keep a copy of any quotes obtained.
– Final invoice and proof of payment.
– Before & after photos (this can be especially helpful in proving that repairs made did or did not improve the property).
Costs for preventative maintenance are deductible as operating expenses. Preventative maintenance is not only essential to keeping your property in ideal working condition and preventing large surprise repair bills, but it will also help keep your tenants happy.
Tax Cuts and Jobs Act (2018)
Most landlords will qualify for this pass-through income tax deduction of either up to 20% of net rental income, or 2.5% of the property’s purchase price plus 25% of the amount paid to employees. This deduction is currently valid until 2025.
If you have and use your own vehicle for business purposes, you can take either a standard mileage rate, or use your actual expenses incurred to determine your deduction.
- The standard mileage rate is set by the IRS and can be updated at their choosing. Mileage rates are calculated based on the IRS-set rate at the time the miles were actually driven.
- If the actual expense deduction is taken, you will need to determine the actual cost of operation including gas, oil, tires, insurance, registration, and depreciation.
- Tolls and parking fees that fall under business use are deductible regardless which method of deduction is used.
IRS travel expense rules: https://www.irs.gov/taxtopics/tc510
Payments made to professionals you hire to do work for you can be deducted as well. These fees can include, but are not limited to, those charged by:
– Real Estate Agents
Your tax rates will vary from year to year, but keeping records so that you’re able to receive all the deductions you qualify for is a constant.