3 Tax Questions Every Landlord Needs to Consider

3 Tax Questions Every Landlord Needs to Consider
5 min read
11 November 2022

Filing your taxes may seem like a daunting task, especially if you’re a new landlord.

With that being said, if you have a good understanding of tax laws, you can save yourself hundreds of dollars every year by taking advantage of deductions.

Here are four questions every landlord should consider when it comes to taxes related to your rental business.

Question 1: Can You Deduct Rental Property?

The first question you might have as a landlord is a fairly simple one: Is rental property tax deductible? While the answer to this question is yes, there’s a bit more to it than that.

To understand how you can deduct rental property from your taxes, you must first understand depreciation. Depreciation is a way for you to get back some of the money you lose from the natural wear and tear a property experiences over time. To qualify for depreciation, you must own the property for over a year, and it must be used for rental purposes. Land doesn’t qualify for depreciation. The property must have a finite lifespan (like a house or a building).

Depreciable assets get deducted annually. To calculate your annual depreciation deduction amount, you divide your property’s cost basis by the property’s recovery period (which is 27.5 years for residential property and 39 years for commercial property).

Question 2: What Expenses Are Deductible?

A key way to save money as a landlord is knowing what rental property expenses are tax deductible. Here are the nine categories of expenses that are deductible:

  1. Property taxes – Every state collects property taxes. The area of your property determines how much you pay in property taxes. The IRS limits the deductions of state and local income, including property taxes, to $10,000.
  2. Mortgage interest – This deduction applies to payments for interest charges. You can’t deduct your initial mortgage payment.
  3. Insurance premiums – This deduction covers basic homeowners’ insurance as well as special peril and liability insurance.
  4. Depreciation – While we already discussed depreciation as it relates to rental property, this isn’t the only depreciable property. You can also depreciate qualifying business equipment.
  5. Maintenance and repairs – These expenses keep your rental properties in livable condition without providing major improvements.
  6. Utilities – Utilities such as electricity, water, and gas can be deducted regardless of how you approach charging them.
  7. Transportation expenses – Only trips related to your rental activities qualify. For example, you can deduct transportation expenses made to collect rent, show your property, meet with stakeholders, etc.
  8. Legal and professional fees – Examples include the cost of a lawyer who reviews rental documents or the use of a CPA or software to file your tax return. You can’t deduct legal fees related to recovering/improving your property or the defense of your property’s title.
  9. Your office – This includes the expense of square footage, rent, or office equipment.

Question 3: What Are Operating Expenses?

Operating expenses are among the most common kinds of deductions you’ll experience as a business owner. An operating expense is any money spent to manage or maintain your business or property.

So, what are operating expenses in real estate? To qualify as a real estate operating expense, an expenditure must meet the following four criteria:

  1. Ordinary and necessary – This doesn’t mean that every expense must be essential. It means that the expense is “helpful and appropriate” for your rental activity. This even includes minor expenses.
  2. Current – This means the expense’s contribution to your property must be used up in less than a year. This includes small repairs, replacements, and disposable materials, but not larger equipment.
  3. Business-related – Personal expenses do not qualify. An office you use to run your rental business, for example, can be deducted. If you use something for both business and personal activities, you can only deduct the percentage of the cost that’s used for business purposes.
  4. Reasonable in amount – Although there isn’t a set amount, the IRS will reject claims if there are more economical ways to get the same result.

Conclusion

While taxes can be complicated, knowing the right questions to consider when it comes time to file them can save you a lot of money. By knowing about depreciation, deductible expenses for landlords, and operating expenses, you’ll be better equipped to handle taxes this year.

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Anuj Rajput 3
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