Utilizing tax deductions can save landlords a lot of money.
First, you must know what tax deductions you qualify for and how to apply them.
In this article, we’ll be going over five tax deductions every landlord should know about.
- Start-Up Expense Deduction
Before your property is placed in service, you won’t be able to deduct repairs and operating expenses as standard deductions. These expenses can, however, qualify for the start-up expense deduction. In your first year of business, you can deduct up to $5,000 in costs you incur before your properties are ready to rent.
Here are some examples of start-up expenses:
- Investigative costs
- Minor repairs
- Insurance premiums
- Office supplies
- Website-building costs
Some expenses that don’t qualify as start-up expenses are:
- Improvements
- Travel expenses
- Interest and taxes
- Real property
- Car and Local Transportation Expenses
In this category, you can deduct local trips for your rental activities that don’t require an overnight stay. Some examples of business-related trips include trips to and from:
- Your rental properties
- Your prominent place of business
- Locations to meet tenants, vendors, lawyers, suppliers, etc.
- A store to purchase materials for your rental activities
- The garbage dump to take trash from your rental properties
You have a couple of options when it comes to deducting these expenses. Your first option is to deduct the specific costs of operating your vehicle for rental activities. These include gas, oil, repairs, maintenance, depreciation, etc.
The quicker and easier way to deduct car and local transportation expenses is to use the Standard Mileage Rate, which allows you to deduct a specific amount for every mile you drive for business purposes. What is the Standard Mileage Rate for 2022? Right now, it’s at 62.5 cents per mile.
Be sure to keep thorough records of your expenses. The IRS keeps a close eye on car and local transportation expenses because they’re easy to over-report.
- Home Office Deduction
A large chunk of landlords these days manage their rental business from home. If you’re one of these landlords, you can probably qualify for the home office deduction, which allows you to deduct some of your home expenses as business expenses.
To qualify for the home office deduction, you must meet the following four criteria:
- You must be classified as a business for tax purposes.
- You must use your home office on a regular basis.
- You must use your home office specifically for rental activities.
- You must meet one of the following requirements:
- You consistently and exclusively conduct your business in your home office.
- You hold business meetings in your home office.
- Your most important business activities are conducted in your home office.
- Your home office is located in a separate building on your property.
- Casualty Loss Deductions
You experience a casualty when a sudden, unexpected occurrence causes damage or loss to your property. A casualty may be caused by a fire, storm, accident, or burglary. You can deduct casualty losses from your taxes if they meet the IRS’s criteria.
In order to qualify as a casualty loss, the damage has to happen suddenly and unexpectedly. Gradual deterioration isn’t deductible.
- Rental Loss Deductions
Most new landlords experience a rental loss at the end of the year and can take advantage of rental loss deductions. A rental loss occurs when all your expenses exceed the revenue you bring in from rent and other sources.
When deducting rental loss, you must follow the passive loss rule. Rent is a form of passive income, and the passive loss rule states that you can only deduct passive losses from your other passive income. You can’t deduct rental loss from your active income (salary from your day job) or portfolio income (investment income).
With that being said, there are a couple of exemptions to this rule. First, there’s the $25,000 offset, which allows qualifying small landlords to deduct up to $25,000 of rental losses from non-passive income. There’s also the real estate profession deduction which allows real estate professionals to treat rental loss as active loss.
Conclusion
Having an understanding of the tax deductions at your disposal can save you a lot of money as a landlord. By knowing about these five deductions and whether you qualify, you’ll be better prepared for this year’s tax season.
