While owning rental properties is a great way of building steady income throughout the year, it certainly comes with expenses and burdens. In order to reduce your tax bill each year, you should pay attention to the deductions available to you and take advantage of as many as possible.
You’ve probably heard the old adage that says, “Nothing is certain but death and taxes.” While it’s morbid and depressing, the statement remains true. Paying taxes is a part of life. For every dollar you earn in this country, you must give a few pennies to Uncle Sam. This holds true for those making money off the American Dream – owning real estate.
With that being said, the IRS isn’t all bad. They offer plenty of tax breaks for property owners. However, you must know where to look. The IRS isn’t going to send you some neatly outlined PowerPoint that says, “These are the deductions you should take.” And with a tax code that presently contains more than 73,000 pages, the odds of you discovering these breaks on your own are slim. That’s why we’re going to do you a favor and highlight some of the deductions you could potentially claim this year.
1. Interest
For most landlords, interest is the single biggest deductible expense. This can come in many different forms, including:
• Mortgage interest payments you make to the bank or financial institution that’s backing the loan used to acquire your rental property.
• Mortgage interest payments you make to the bank or financial institution that’s backing the loan used to improve your rental property.
• Interest on any personal loans used for items related to rental activity.
• Interest on credit cards for goods and services used in relation to rental activity.
Keep in mind, though, that you can’t deduct principle payments on your loan. You’re only able to deduct the interest portion. You can read more about the intricate details of deducting interest on rental properties by browsing this guide by Nolo.
2. Home Office
While being a landlord may seem non-traditional, you probably still need an office to conduct business. You need somewhere to record expenses, file documents, set up marketing strategies, schedule appointments, and handle the many other responsibilities of being a landlord.
If you use a dedicated room or space for this business, you’re in luck. You can actually claim a fraction of your home’s expenses as a deduction against the revenue you accrue from your rentals.
In 2013, the IRS simplified home office deductions by creating a streamlined method. While you can still use the old method, which involves a number of precise calculations, the simplified option is preferred by many. It just asks you to multiply the allowable square footage used in your home by the prescribed rate. For this year, that prescribed rate is $5 per square foot (up to 300 square feet). So, for a 100 square foot home office, you’d be able to deduct $500 against your rental revenues.
3. Repairs
As a landlord, you understand how costly repairs can be. Something always seems to be breaking. While certain repairs don’t cost much, some can be really expensive. And when analyzed over a 12-month span, repairs can easily add up to thousands of dollars. Thankfully, you can deduct any repair that’s completed in an effort to maintain the current condition of your property. This includes everything from plumbing and HVAC parts to labor costs and the rental fees for repair equipment.
4. Maintenance
Similarly, maintenance is also tax-deductible. While it’s easy to confuse maintenance work with repairs, maintenance doesn’t involve fixing anything. For example, you may choose to plant a tree in the front yard, but you’re not fixing anything. Examples of maintenance include landscaping, pool cleaning, pest control, light bulbs, cleaning supplies, and HOA fees.
5. Travel
According to a 2013 survey by Cozy, 50 percent of landlords don’t live near the properties they own. This means there’s a great deal of back and forth travel involved. Well, the good news is that any long distance travel is tax-deductible as a business expense. This includes hotel accommodations, airline fares, car rentals, and even 50 percent of meal expenses.
6. Utilities
If you personally pay the utilities on your rental properties, you can deduct these expenses. Just make sure you don’t deduct them if your tenant is actually footing the bill. Examples of tax-deductible utility expenses include electricity, water and sewer, gas, and trash and recycling services.
7. Legal/Professional/Management Fees
The way the tax code is currently set up, you can deduct any expenses related to professional fees. In other words, the following fees are deductible:
• Legal fees associated with the drafting of rental contracts
• Property management expenses
• Accounting expenses for your rental properties
• Real estate investment advisor fees
Virtually any professional expenses you pay for related to your rental activity is deductible from your revenues.
8. Operating Expenses
While we briefly touched on deducting your home office, you may also be able to deduct some of the things in your office. For example, things like ink and printer paper, software, legal forms, phone bills, and computers can all be deducted. While saving these receipts throughout the year may seem pointless – especially when you’re purchasing at a $10 ink cartridge – the reality is that these things add up. Just $25 of operating expenses per week can add up to $1,300 at the end of the year.
At Green Residential, we understand the struggles of being a landlord. There’s always something to be done and little time to do it – that’s where we help. Our goal is to help Houston landlords efficiently and effectively manage their properties when time is at a premium.
From finding and screening tenants to collecting rent and scheduling repairs, we make the landlord experience hands-off for our clients. Best of all, our services are tax deductible. Contact us today with your questions and we’ll be happy to provide you with more information!
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