As a landlord, you have to operate like a business owner. You’re providing both a good and a service—housing—to customers. That means good customer service and business practices are important.
Because you’re running a business, that means you get to take advantage of many tax deductions for business expenses. Many of these deductions aren’t available to typical homeowners, but using them can help you maximize the profit from your rental properties.
Key Takeaways
- Landlords are treated like business owners and can take many tax deductions on their rental property.
- These deductions can reduce your tax bill.
- Depreciation reduces your taxable income, but also your cost basis, which can increase capital gains taxes down the line.
- Consult with a tax professional for advice on your specific situation.
Depreciation
As a landlord, you are allowed to depreciate the value of portions of your rental property over time. You can use the depreciation to reduce your profits and lower your tax liability.
How much you can deduct for depreciation each year depends on the following details:
- Your cost basis on the property
- The recovery period for the property
- The depreciation method you use
“Even if you don't yet have any renters, you can write off depreciation as soon as your house is available for rent,” Levon L. Galstyan, a Certified Public Accountant at Auburn, California-based Oak View Law Group, told The Balance in an email interview. “The deduction may be utilized during the anticipated useful life of the property, but it must be disbursed over a number of years. As per the IRS, rental properties can depreciate over 27.5 years.”
You can use either an accelerated depreciation formula or straight-line depreciation method. An accountant or tax professional can advise you on which is the best to use.
Note
Depreciation reduces your cost basis in the rental property, which means you may pay more in capital gains when you sell the home.
Passive Activity Losses
Owning and renting out a property is considered a passive activity by the IRS. Special tax rules apply to passive activities that allow you to deduct some of your losses against other types of income.
As a landlord, you may deduct up to $25,000 of your passive losses against your regular income, assuming your modified adjusted gross income (MAGI) is $100,000 or less. The deduction phases out until you reach a MAGI of $150,000; after that, you can no longer take the deduction at all. So if you had to pay more to operate and maintain the rental than you earned in rental income, you may be able to deduct your losses.
The exception to this rule is if you’re considered a real estate professional, which requires that you work at least 750 hours a year on real estate.
Repairs
Homes often require maintenance and repairs, such as replacing broken roofs or appliances, fixing the plumbing, and other upkeep. Just make sure you keep good records of these costs.
As a landlord, you can deduct the cost of materials, labor, and maintenance that is necessary to keep your rental property in good condition for your tenants. You’ll need to differentiate between simple repairs and improvements to the rental property—improvements may not be deductible. If you also use the rental property for personal use, such as a vacation home, your deductions may be limited.
Travel
Unless you live right next door to your rental property, you’ll have to travel to and from it when you’re making repairs, showing it to potential tenants, and completing other tasks on the property. You can deduct the cost of travel to and from your property for these purposes from your profits.
You can choose to make deductions using the IRS standard mileage rate or you can track the actual cost of gasoline and maintenance on your vehicle. You can also deduct related costs such as parking fees, tools, and interest on your car loan.
Note
If you use your car for both personal and business activities, you will need to split the expenses between personal and business use. You can divide it based on the miles driven for both purposes.
Interest
Interest on a mortgage that you used to buy a rental property is considered a business expense. You can deduct any interest you pay that tax year from your rental income.
You can also deduct interest on other things that are used for business purposes, such as interest on business credit cards—just make sure the charge is for a business-related expense.
Other Deductions for Landlords
There are many other deductions that may be available to landlords depending on how you run your business. For example, if you have a home office that you use exclusively for your real estate business, you can take the home-office deduction.
Other property-related costs, such as property taxes, are also considered a business expense and deductible.
If your business has employees or hires professionals, Galstyan said that there are other deductions available.
“Landlords are allowed to deduct employee wages and salaries, including those of residential managers and groundskeepers employed by their staff,” Galstyan said. “Independent contractors can also be utilized to deduct other tax-deductible services, including architects, landscapers, and gardeners; roofers, carpet layers, painters; carpenters, electricians, and plumbers.”
Frequently Asked Questions (FAQs)
Do landlords pay taxes on rent?
Landlords must report to the IRS all rental income for properties they own. Landlords can then take certain deductions against the rent they receive. For example, they can deduct depreciation, repairs, and other costs of being a landlord. The landlord must then pay taxes on the net rent income they report on Schedule E. If you have more than three rental properties, you’ll need several Schedule E forms.
How do I get tax deductions as a landlord?
As a landlord with rental property income, use Schedule E with tax form 1040 to report your income or losses. There may be other schedules and forms that you need to file, depending on your situation. You can find a list at the IRS website or work with a tax professional.
