If you just finalized your 2018 Tax Return and you’re now focused on how to “legally” lower your tax rate for 2019, you should read on. There are lots of tax benefits of being a landlord, most all expenses are tax deductible, from finding tenants to fixing faucets. The benefits of cash flow and tax deductions can make owning rental properties worthwhile.
1. Tax Deductions for Landlords
Many rental home expenses are tax deductible. Save receipts and any other documentation, and take the deductions on Schedule E. Figure you’ll spend four hours a week, on average, maintaining a rental property, including record keeping.
In general, you can claim the deductions for the year in which you pay for these common rental property expenses:
•Cleaning and maintenance
•Commissions paid to rental agents
•Homeowner association/condo dues
•Legal fees, Accountant fees, Property Manager Fees
•Taxes, including property taxes
2. Travel Expense Deductions
You can deduct expenses for local travel to a rental home for activities such as showing it, collecting rent, or doing maintenance. If you use your own car, you can claim the standard mileage rate, which is 54.5 cents per mile, plus tolls and parking.
Traveling outside your local area to a rental home is another matter. You can write off the expenses if the purpose of the trip is to collect rent or, in the words of the IRS, “manage, conserve, or maintain” the property. If you mix business with pleasure during the trip, you can only deduct the portion of expenses that directly relates to rental activities.
3. Repairs and Improvement Deduction
Another grey area is repairs vs. improvements. The tax code lets you immediately write off repairs (any fixes that keep your property in working conditions) as you would other expenses. The costs of improvements that add value to a rental property or extend its life must instead be depreciated over several years.
Think of it this way: Simply replacing a broken window pane counts as a repair, but replacing all of the windows in your rental home counts as an improvement.
Depreciation refers to the value of property that’s lost over time due to wear, tear, and obsolescence. In the case of improvements to a rental home, you can deduct a portion of that lost value every year over a set number of years. In general, you depreciate the value of the home itself (but not the portion of the cost attributable to land) over 27.5 years. You’ll have to stop depreciating once you recover your cost or you stop renting out the home, whichever comes first.
Depreciation is a huge tax benefit, but the calculations can be tricky. Read IRS Publication 946, “How to Depreciate Property” for additional information.
5. Profits and Losses on Rental Homes
The rent you collect from your tenant every month counts as income. You offset that income and lower your tax bill by deducting your rental home expenses including depreciation. If, for example, you received $9,600 in rent during the year and had expenses of $4,200, then your taxable rental income would be $5,400 ($9,600 in rent minus $4,200 in expenses).
You can even write off a net loss on a rental home as long as you meet income requirements, own at least 10% of the property, and actively participate in the rental of the home. Active participation in a rental is as simple as placing ads, setting rents, or screening prospective tenants.
If your modified adjusted gross income (same as adjusted gross income for most persons) is $100,000 or less, you can deduct up to $25,000 in rental losses. The deduction for losses gradually phases out between income of $100,000 and $150,000. You may be able to carry forward excess losses to future years.
Let’s say that for the year rental receipts are $12,000 and expenses total $15,000, resulting in a $3,000 loss. If your modified adjusted gross income is below $100,000, you can deduct the full $3,000 loss. If you’re in a 22% tax bracket, a $3,000 loss reduces your tax bill by $660, plus any applicable state income taxes.
6. Tax Rules for Vacation Homes
If you have a vacation home that’s mostly reserved for personal use but rented out for up to 14 days a year, you won’t have to pay taxes on the rental income. Some expenses are deductible, though the personal use of the home limits deductions. The tax picture gets more complicated when, in the same year, you make personal use of your vacation home and rent it out for more than 14 days.
Being a landlord is not for everyone, but those who want a passive income stream, with lots of tax write offs, will prosper.