Tax time is looming – again. This means that landlords across the country are compiling expense and income reports, and rushing to get their taxes in before the deadline, which this year is April 18.
While tax time has to be the most tedious time of the year for landlords and small business owners alike, one of the benefits of being a landlord is the myriad of tax deductions that you’re able to take advantage of. The IRS considers rental property activity to be a business, and while you have to report your income, you can also take advantage of some excellent tax breaks that are available to professional landlords.
The fact is, though, that many landlords aren’t aware of just how many expenses they’re able to write off, especially when they’re first starting out. This is unfortunate, because these deductions can help you save on your tax bill, and they can add up considerably over time.
While you’re undoubtedly hard at work on your taxes, you’ll want to spend a few moments to ensure that you’re taking advantage of all the deductions that are available for landlords. Here’s a look at a few things that you can do to help reduce your tax bill this year.
Take Advantage of Deductions
Deductions are a landlord’s best defense against exorbitant tax bills. And knowing how to use them effectively can help you to save.
Repairs are considered to be any effort to maintain the current condition of the property. Upgrades usually don’t fall into this category, but fixing the air conditioning unit, painting, plumbing, repairing the foundation and roof, and contractor expenses are usually deductible. Keep in mind that the IRS differentiates between repairs, which you’re able to deduct, and improvements, which can’t be claimed as a deduction but instead must be depreciated over a period of several years.
Maintenance costs are expenses involved with the upkeep of your property. This includes regular maintenance like landscaping and tree trimming, as well as pest control, HVAC filters, pool chemicals, lightbulbs and even smoke detector batteries. Keep your receipts; these little expenses can add up fast.
3. TRAVEL EXPENSES
An estimated 50 percent of American landlords do not live near their rental properties. If you’re a long-distance landlord, you can deduct travel expenses to and from your rental, including airfare, car rentals and hotel costs. You can even deduct 50 percent of your meal expenses during long-distance travel. If you live near your rental, you can still deduct the expenses involved with trips to and from the rental. This means that you can track and claim your actual expenses, including gasoline, oil and vehicle upkeep. Or you can just use the standard mileage rate and deduct a certain amount per mile that you drive for rental activity. The IRS sets a new standard mileage rate every year.
If you’re paying the mortgage down on your property, interest on the loan is deductible. In fact, for many landlords, mortgage interest is often their single biggest deductible expense. If you’ve used credit cards or a loan to pay for any expenses with the property, interest on these expenses is also tax-deductible.
Insurance on the rental property – including coverage for fire, theft, liability and more – is deductible.
6. PROFESSIONAL SERVICES FOR THE RENTAL
If you need to hire a professional for services pertaining to your rental, you can deduct those expenses. This includes the cost of legal services, accounting and property management fees. You can also claim some expenses related to evictions, such as some court costs and filing fees.
7. SELF-EMPLOYED HEALTH INSURANCE
If you’re self-employed and responsible for your own health insurance, you can deduct your premiums. According to TurboTax, these will be taken off of your adjusted gross income, rather than being included as an itemized deduction.
8. STATE AND LOCAL SALES TAX
You’ll also have the option to claim either state and local income taxes, or local general sales tax that you paid during the year, but not both. So if your state has no income tax, consider deducting state and local sales taxes that you paid throughout the year. Have a look at the IRS sales tax calculator to determine the amount of taxes that you’ll be eligible to claim.
9. DEPRECIATION OF ASSETS
Depreciation is another significant deduction. Even though your rental property is most likely appreciating in value, the IRS treats it as though it were depreciating. Depreciation is claimed by spreading it out over a specific period of time, usually 27.5 years. The value of the contents of the building, as well as most improvements that you make to the property, can be depreciated separately over a shorter timeline – usually five years.
It may sound trite, but checking everything on your form is important. The IRS can penalize you for making mistakes or for sending in the wrong form, and you’ll want to ensure that you run through your paperwork and double-check your figures before you send it off, so you can make sure the information is correct. Have you correctly calculated your balance due? The most common error on tax returns is bad math, and mistakes calculating totals or transferring figures are a certain way to receive a correction notice back from the IRS. The good news is that these errors largely can be avoided by using a tax software program, like TurboTax, for instance, when filing your return. You’ll also want to make sure you mail your return to the right address if you’re submitting by mail, and of course, make sure you’ve signed it. Carefully checking your tax return for accuracy can help to save you from the frustration of owing more than you should – or, worst-case scenario, an audit.
1. ENSURE YOU HAVE DETAILED RECORDS
While tax deductions are an important – and legitimate – way to save on your tax bill, keep in mind that the IRS tends to scrutinize many deductions, some more than others. It’s important to ensure that you have proper documentation should you get audited. It also means that you can’t be too careful when claiming deductions – and ensure that you only take deductions that are allowed. For example, don’t try to pass off a vacation as a business expense, unless that was the sole purpose of your trip. If you can’t verify the business necessity of your expenses, avoid claiming them on your taxes. This will save you from having to pay the amount, plus interest, if you’re audited.
2. CONSIDER FILING AN EXTENSION
Finally, if you find yourself in a time crunch, and unable to get your taxes done, be sure to take advantage of the option to file for an extension, which will give you until Oct. 17, 2017, to complete your taxes. Just remember that this doesn’t give you longer to pay, just longer to file. So calculate your estimated payment, and pay your taxes, you can always get the difference back as a refund.
And, of course, make sure you file your extension on time – it must be postmarked by April 18, 2017.
If you do file an extension, consider using the extra time to find a great accountant who may be able and willing to take on a new client, once the rush of tax season is over. While hiring an accountant is always a good option for those who are short on time, working with an experienced certified public accountant may even help you save money. An experienced accountant will be extremely familiar with the tax code and deductions, and will be able to help you take advantage of options that can help you cut your tax bill. And remember, the accounting fees are tax-deductible.
Finally, a word to the wise: Starting early is the best way to save on your taxes. Keeping track of all of your expenses and maintaining good records of income you receive from your tenants can make life easier when tax time rolls around again.
Are you prepared this tax season? Learn more about rental property with this helpful guide from Renters Warehouse.
Always consult a CPA or licensed tax professional for information on taxes. This article is meant to guide and inform – Renters Warehouse employees are not certified tax professionals, and your individual tax situation may vary from the above scenarios and examples depending on your circumstances.