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INVESTING 101 EDUCATION

6 Tax Deductions You Can Take as a Landlord

There are significant tax benefits to being a landlord. As a landlord with rental property, you can take numerous tax deductions on your tax return. Surprisingly, many landlords don’t take advantage of all the tax deductions available to them; usually, because they aren’t aware of them, or they don’t think they’re entitled. The list below of allowable landlord tax deductions should help you take full advantage of your position as a rental property owner.

The other aspect of these tax deductions that’s so appealing is that they are allowable no matter what tax bracket you’re in. So whether you own one rental property or whether you make a great living off of multiple properties, you can take these landlord tax deductions. Finally, being a landlord doesn’t have to be your full-time occupation, nor does it have to be a full-fledged business enterprise to legally take these deductions. Essentially, you can offset other income you get from your regular “day job” by applying these landlord tax deductions on your tax return.

1. Wages Paid to Employees and Independent Contractors

Whether you’re a passive rental real estate investor or a hands-on landlord, you no doubt have people you pay to perform rental property tasks for you. Maybe you hired a maid to clean the place in between rental terms, or you hired a painter to spruce up the exterior before your first rental. If you’re a passive real estate investor, you probably have a property manager whom you pay on a monthly basis to manage tenants, rents, etc. All this money that you’re paying out to people to perform work concerning your rental property is tax deductible, whether they work for you once or repeatedly, as long as you hire and pay them directly. This includes service people you might not think about, like:

  • gardeners/mowers
  • sprinkler system installers
  • refuse haulers
  • property inspectors
  • photographers
  • property description writers
  • window washers
  • real estate advisors/consultants
  • septic installers

You can even deduct any tips you pay to these service providers so long as you pay them with a recordable instrument, such as a check. Any time you pay a person to do anything for or about your property that is a tax-deductible expense.

What You Can’t Deduct

If you hire a property manager and they hire someone to perform work on your property, even if it’s just a special, one-off job, you can’t deduct that third party’s wages. That deduction would go to the property management company.

2. Commissions

Real estate agents, managers, salespersons and others sometimes charge commissions for successful real estate work. If you use an agent that charges a commission, you can deduct that on your tax return. If you want to offer others a special commission for referrals, such as for tenants, that too is a legal tax deduction.

What You Can’t Deduct

You can’t deduct any kind of unofficial cash kickback paid out for real estate services rendered. If the commission terms are not in writing and there’s no record of payment, it’s not going to be a valid deduction.

3. Ordinary and Necessary Expenses

The IRS understands that maintaining a rental property takes some cash. You’re permitted to deduct ordinary and necessary expenses for managing, maintaining and conserving your property. This includes things such as property taxes, interest payments, marketing and advertising for the property, maintenance and upkeep, utilities, insurance, and repairs. You can also legally deduct the materials associated with those ordinary and necessary expenses.

For instance, if you hire someone to design a marketing flyer to advertise your property for rent, you can deduct the wages you pay to the independent contractor (per number 1, above), plus the cost to have the fliers printed, plus the postage to mail the fliers. If you hire someone to reply to emails or phone calls from interested parties, you can deduct those wages, too. If you have a great tenant who takes the initiative to do things like buy replacement furnace filters, you can reimburse your tenant and take the filter expense cost as a tax deduction.

What You Can’t Deduct

You aren’t allowed to deduct the cost of improvements made to the property. For example, if you have a working lamppost light, you can’t deduct the cost of buying a new one just because it will make the curb appeal nicer. You can only take that deduction if the previous light was non-working. Any kind of “betterment” to the property should be recovered in a different tax category called depreciation, which is discussed further on.

4. Travel to Visit Your Rental Property

You’re allowed to deduct the cost of your travel to check on your rental property periodically. This is an attractive tax deduction if your rental property is in a gorgeous tourist area such as Belize. Say you live in Texas, but you have full or a fractional share of a property in Belize. You can deduct the travel cost of your airfare to and from your property. You can also deduct necessary ground transportation costs, such as shuttles, taxis, and car rentals. You can deduct the cost of the hotel during your stay. To legally take travel deductions, the primary purpose of the trip must be to collect rent, manage, conserve or maintain your rental property. The purpose cannot be to improve the property. You can deduct up to 50% of meal expense from your trip.

What You Can’t Deduct

You can’t deduct associated expenses with your trip that are unrelated to your rental property, such as leisure activities. You can’t deduct the travel expenses or any portion of meal expenses of your family or friends unless they are materially involved in the allowable activities stated above. You can’t deduct meal

5. Depreciation

Depreciation is arguably the most powerful landlord tax deduction. There are multiple things that can be listed as a tax deduction under depreciation such as the value of the property, the value of materials used to improve the property, and the value of equipment used to maintain or manage the property, such as computers. The depreciation deduction must be spread out over two or more years and is a complicated formula. For that reason, using a tax advisor to calculate the depreciation deduction is recommended.

What You Can’t Deduct

You can’t deduct the depreciation of the land that the rental property is on. You can’t deduct the value of materials that you procured for free. For example, if you took old kitchen countertops from your primary residence and re-used them in your rental property, those countertops would not be a legal deduction.

6. Marketing and Advertising

It was mentioned above that advertising fliers are tax deductible, but it’s worth mentioning that any marketing or advertising costs are a legal landlord tax deduction. For example, if you wanted to build a website to advertise your various properties for rent, you could deduct every expense related to that including the design, build, hosting and content expenses. You can deduct radio ads, online ads, and newspaper and magazine ads.

What You Can’t Deduct

If you use certain software, such as Photoshop, to work up your marketing materials but you also use it for entertainment or leisure purposes, you can’t legally claim 100% of that software expense. If your advertisement contains a reference to anything other than your rental property, only a portion of that expense would be deductible.

As you can see, there are many tax deductions you can take as a landlord. These deductions are valuable for offsetting other income you make, such as from your regular job. One caveat to keep in mind is that you should enlist the assistance of a tax professional to ensure that you properly record your deductions on your return. Accurate and consistent recordkeeping is also vital in staying on the right side of the taxman. Finally, always be honest about your deductions. There are plenty of ways to save on your taxes by taking legal deductions. Any small change you might save by unfairly taking a deduction isn’t worth the trouble.

If you’re interested in testing the waters of being a landlord in the U.S. or beautiful Belize, please contact American Real Estate Investments today.