Tax Season Update: What Every Residential Landlord Should Know

Tax season is upon us, and if you own rental property, you’re going to want to give the following points a read before mailing off your forms. Why? Thousands of property owners across the country lose millions of dollars each year by overlooking some basic tax breaks. Landlords, here are a few deductions to look into:

1. Mortgage Interest Payments
As a landlord, interest is often going to be your most significant deductible expense. Typical examples of deductible interest include:

• Mortgage interest payments on loans used to acquire or improve rental property, and

• Interest on credit cards for goods or services used in a rental activity.

2. Depreciating Value
The actual cost of a rental property isn’t fully deductible for the year in which you paid for it. Instead, landlords get back the cost of real estate through depreciation. For tax purposes, this means deducting a portion of the cost of the property over the course of a number of years.

3. Maintenance and Repairs
The cost of repairs to your rental property (provided the repairs are necessary, ordinary, and of reasonable cost) are fully deductible in the year in which they are incurred.
In addition, when you hire someone to perform services related to your rental property, you may deduct payment, including salary, as a rental business expense. This is the case regardless of whether the worker is an employee or an independent contractor.

4. Travel Expenses
As a landlord, you’re entitled to a tax deduction whenever you travel for rental-related business. This even includes small trips, for example driving to your rental property to follow up on a repair, or paying for parking during a trip to the hardware store to purchase plumbing materials.
You have two options for deducting vehicle expenses:

• Deducting your actual travel-related expenses (including fuel and car maintenance and repairs), or
• Using the standard mileage rate. However, to qualify for standard mileage rate, a landlord is required to apply the standard mileage method from the first year you use the vehicle for rental related purposes. In addition, the standard mileage rate is unavailable to you if you have previously claimed accelerated depreciation deductions or have applied a Section 179 deduction.

If you travel longer distances for your rental activity, you may deduct airfare, lodging, and other trip-related expenses. Take note, however, that in audits, the IRS is known for looking closely at overnight travel deductions. More than one taxpayer has found themselves in hot water for claiming travel-related deductions without the necessary records for support. To avoid headaches – or more – make sure you’re properly documenting every phase of your travels

5. Home Office Deductions
In many cases, landlords may deduct home office expenses from taxable income. This break not only includes actual office space, but may also apply to, for example, a workshop used for your rental business. In fact, any work-related space may qualify.

6. Theft and Casualty Losses
Damage and destruction to your rental property may qualify you for a tax deduction for part or, in some cases, even all of the loss. Insurance coverage and the magnitude of the damage will influence your total permissible deduction.

7. Insurance Premiums
A landlord is permitted to deduct premiums paid for most rental-related insurance, including theft, fire, flood, and landlord liability. In addition, your employees’ health and workers’ comp insurance may qualify for further deductions.

8. Operating Expenses for Professional Labor
Finally, you can deduct any payments made to attorneys, accountants, management companies, real estate advisors, and other professionals as operating expenses, as long as the fees are paid for work related to your rental activity.

We hope these tips were helpful.  As always, contact USAG with any of your real estate appraisal-related needs, including real estate consultation and advisory services.  We look forward to hearing from you!

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After graduating cum laude from Indiana University Maurer School of Law in 2004, Jessica practiced as a litigation attorney in Boston and Chicago. She is now the Business Development Manager for US Appraisal Group’s Attorney Services Division, and lives in downtown Chicago.

Email: jedgerton@usappraisalgroup.com

Mobile: 312-342-0880