Maintaining a rental property requires you to coordinate many different responsibilities, from maintenance and tenant management to paying property taxes. It also requires accurate record-keeping so that you can properly report all income and expenses on your tax return.
Landlords have unique opportunities to claim property deductions on their taxes. Tax laws frequently change, including the overhaul introduced with the Tax Cuts and Jobs Act of 2017 (TCJA), so property owners need to know exactly what they can and cannot deduct from their rental property income.
This guide will cover what rental property deductions are, how to report them, and give you a rental property deductions checklist to make sure you are deducting everything you can on your tax return.
What Are Rental Property Deductions?
You must report all your rental income on your taxes each year. This includes any kind of payment received for use of your property (aka rent payments), in addition to advance rent, security deposits, payments for lease cancellations, services received instead of rent, and other income. These income sources can add up fast on your taxes, especially if you own more than one rental property.
Fortunately, landlords can deduct the expenses associated with their rental properties to lower their tax bill. Expenses may include loan interest, property tax, depreciation of the building, repairs and maintenance costs, mortgage interest, and more. Below we will list deductions you can take on your rental property.
10 Deductions for Your Rental Property
Make sure you know which rental property expense you can deduct to help minimize your tax burden. Here is a checklist of rental property deductions so you won’t leave anything off your tax return.
You can deduct the depreciation of your properties on your taxes because they lose value as they age. Internal Revenue Service (IRS) Form 4562 helps you calculate depreciation for each property.
2. Repair and Maintenance Costs
You may deduct the cost of repairs and maintenance to your property. Note that if you pay for a major update, like a new roof, it may be considered a capital improvement that will be reported as depreciation over several years.
3. Utility Costs
The costs of heat, gas, sewer, or trash are deductible if you pay for them for your units.
4. Mortgage Interest and Insurance
Anything you pay in mortgage interest and mortgage insurance on your rental is deductible on your taxes.
5. Qualified Business Income Deduction
You may qualify for the Qualified Business Income (QBI) Deduction, which allows pass-through businesses, like LLCs, to deduct up to 20% of rental income. Your operation must qualify by the IRS as a trade or business and meet other eligibility requirements, however.
6. Home Office Deduction
Some landlords may qualify for the home office deduction, which could apply to a home workspace or workshop that is used for your rental business.
7. Professional and Legal Fees
You can deduct fees paid for professional services you used for your property business, such as an accountant, property management company, or attorney.
8. Property Taxes
Landlords can deduct the property taxes they pay on their rental properties.
9. Tenant Screening Costs
You may have to cover the costs of background checks, credit checks, employment verification, and other screening tasks when approving tenants for your rentals. These costs are deductible.
10. Travel Expenses
The cost of travel-related to your property business may also be deductible. If you travel to a resident’s unit for a maintenance request or to conserve the property, for example, you can make deductions. Make sure to keep records of how the travel was related to your business, including any meetings held or property viewings.
This checklist will help you when completing your taxes each year. Take advantage of every tax break available for your rental property business because your responsibilities as a landlord are time-consuming and expensive. You may want to meet with a tax professional to ensure that you are reporting everything correctly and claiming all deductions available to you.
Things to Know When Reporting Rental Property Deductions
Landlords will report rental income, expenses, and depreciation on Schedule E, Part I of Form 1040. If you have multiple properties, you may attach additional Schedules Es. Rental income is taxed as regular income, so your tax rate will depend on which tax bracket you are in each year. Keep the following things in mind when preparing your taxes.
Landlords do not have to pay self-employment taxes, even though they are technically running a business. The TCJA states that rental income is not subject to FICA taxes.
Passive Income Loss Rule
Rental property activities are considered passive activities by the IRS. You can offset passive income with losses from other sources of passive income, such as other rental properties. You cannot, however, use a net loss as a deduction to offset income from a regular job, or other sources of earned income.
Renting to Friends and Family
Sometimes you might want to avoid renting your property to friends and family. You can still receive rental income from them, but you will likely not be able to take advantage of all the rental property deductions on your taxes.
It is always wise to keep thorough, accurate records for your rental properties. Doing so will help you report all income and expenses when tax season is here. Retain receipts and keep track of all expenses you deduct. Track each avenue of income you receive throughout the year.
These are a few important considerations when you are getting ready to prepare your taxes. It may seem like a lot of information to handle, but with the right experts on your side, you will be ready to claim all the deductions you can.
Contact Nomadic Real Estate for More Information
The tax laws surrounding property management can be complex and ever-changing. Consider meeting with a property management professional to help you make sense of your obligations and to implement best practices for your property rental business.
The team at Nomadic Real Estate provides property management services for residential property owners and investors. We help you find peace of mind as we take on the leasing and management work for you. Contact us for more information about your Greater D.C. property management needs.