Property Owners and Tax Time

The key to saving money on your tax return is to take advantage of the many deductions offered to full-time rental property owners. Your property is considered a full-time rental if you allocate fewer than 15 days for personal use.

Some of the most basic deductions that landlords could easily overlook are costs related to cleaning and maintenance, property taxes, management fees, mortgage interest, advertising, and even property insurance.

Want to save even more money? You can also deduct expenses related to traveling to manage your property, depreciation of your property, HOA fees, insurance claim deductibles, operating expenses, and even your utilities. Basically, any cost you incur to keep your rental property up and running can be filed as a tax deductible expense.

If your rental property expenses exceeded your rental earnings, you can even deduct your losses. If your annual income (adjusted gross income) is below $100,000, you are eligible to deduct up to $25,000 of your rental losses. As your annual income increases, the rental loss deduction is reduced.

One of the best tips any landlord could get is to keep meticulous records or better yet, hire a professional property manager to keep these records for you. You must treat your rental property like a business. The more expenses that you document, the better chance you have to get those tax deductions and keep more of your money. Rental Management One provides detailed expenses reports and even copies of expense receipts for our Owners to turn into their CPA making this important task a “non-stress” related task.

New to the Rental Game

With the popularity of travel websites such as Airbnb, many people are interested in the opportunity to turn their primary and/or secondary home into a money making property, which is a great idea I might add. The good news is, for rental experts and noobs alike, you can dramatically benefit by adding a professional property manager to your business team. The cost is low but the value is worth every penny. Call Rental Management One at 248-208-3882 and start getting the most money out of your rental property.

10 Great Reasons to Have A Property Manager

When you hire a professional property management company, you save time, money, and lots of hassles. They can handle all aspects of your properties daily operations, legal aspects, and transactions, ensuring efficient management. There are many things you should know about such a service.

1. They screen the tenants
Every property owner wants to ensure that they have the best-possible tenants who pay their rent on time. Timely rent is the key to generating regular income. You want to find the kind of tenants who are careful about how they use the place and not cause any damages. Thus, you will not have a tenant who doesn’t pay on time or causes damage to your property.

2. They manage all the repairs & maintenance

Another good thing about a good property management company is that they manage all the repairs and maintenance for your property. Whether it’s the plumbing, electrical systems, equipments or building, the manager will arrange for the job work. They will also monitor the work to ensure quality compliance.

3. They Fill Up Vacancies & Ensure Optimal Retention

This is something that you cannot do on your own like a professional. No one wants properties to remain vacant. You will not have to spend all your time marketing your property. An experienced manager will shorten vacancy time by getting the right tenants. Besides, they will also work to ensure longer average retention.

4. They Deal with Legal Issues

An experienced property management service can handle one of the biggest challenges as an owner – legal issues. They know about the latest tenancy laws and can take the right action to prevent or alleviate legal tussles.

5. They handle all Documentation

Property management is not just about handling the day to day operations, it also involves a lot of essential paperwork. When you hire a professional service, you will not have to spend all your time dealing with potential-tenants’ credit reports, drawing the lease agreements, doing background checks, and dealing with the billing, and notices.

6. They already have Lists of Contractors

When you hire a property management service, they already have lists of contractors in the area. Whether it is fixing the plumbing, cleaning, or removing the snow, they will already know the right people to call for the job. They can also help you save more by getting special rates due to their well-established relationships.

A property manager will ensure that everything keeps running smoothly and efficiently. They will negotiate and secure contracts for clean-up, landscaping, trash removal, mowing, and other services.

7. They Deal with the Tenants

Your property manager acts as the contact with the tenants. A property manager will address all problems at all hours so that you will not have to drive over to the place. This means a lot of convenience and a hassle-free owner experience.

8. They Ensure Timely Payments

Another good thing about hiring the services of property management companies is that they take care of rental collection and bill payments. They will also enforce the lease policies if your tenants fail consistently to pay rents.

9. Get Tax Deduction

Property owners can also claim a tax deduction for the professional services of a property management company. Thus, hiring a property management service can help save money in several ways.

10. They Keep Everything Well Organized

One of the best things about hiring a property management service is that they keep everything organized for the owners. It can be almost impossible for you to keep track of all the details on your own.

Call Rental Management One for your free property evaluation and management quote today!

Tax Deductions Available for Rental Property Owners

Owning property is a huge part of the American dream, and at times it seems the IRS is trying to reward such behavior. In this article, I review the best federal tax deductions available to rental property owners in the United States.

What Qualifies as an Expense?

There are two types of expenses: Current Expenses and Capital Expenses.

Current Expenses

These are generally one-off items that help keep the property in good working condition and habitable, or help you operate your rental business.

The entire expense can be deducted from your taxes in the same year that it was incurred – hence “current” expenses. Repairs are generally expected to restore an item to its previous working condition.

To qualify as a current expense, it must be considered:

  1. Ordinary and Necessary
    Ordinary expenses are those that are common and generally accepted in the business. Necessary expenses are those that are deemed appropriate, such as interest, taxes, advertising, maintenance, utilities and insurance.
  2. Current
    Must have more short-term value than long-term value. Fixing a hot water heater has short-term value. Replacing the appliance has long-term value.
  3. Directly Related to your Rental Activity
    The expense must be business related.
  4. Reasonable in Amount
    If you claim to have paid $500 for a toilet seat, you will get audited.

Capital Expenses

Anything that increases the value of the property or extends its life is categorized as a “capital expense” or “improvement” and must be capitalized and depreciated over multiple years.

My general rule of thumb is any item that costs hundreds of dollars (or more) to replace should probably be deducted as a capital expense.

For a more detailed explanation and specific examples of each, read the article: Repairs vs. Improvements – What Can I Deduct from my Taxes?

Top 12 Tax Deductions for Landlords

Before claiming any of these deductions, be sure to have detailed and thorough records to back them up. Rental Management One provides all these records and documents for you to supply to the IRS. The IRS scrutinizes these deductions (some more than others), and you need to be prepared should you get audited. If you fail to have proper receipts and cannot validate the business necessity of each expense, you will have to pay the amount due, with interest, if you get audited.

1. Loan Interest/Points

If there is a mortgage on the property, the loan interest will probably be your single largest deductible expense.

In 2013, I paid $19,000 in interest on one of my mortgages. Further, if you paid buy-down points on the property purchase or mortgage refinance, you’ll be able to deduct those as well.

  • Mortgage Interest (primary & secondary)
  • HELOC Interest for loans used to repair or improve the property
  • Credit card interest on items used for the property
  • Mortgage Points to purchase or refinance a rental property

Keep in mind, you can only deduct interest on money that was actually spent on your rental business. Therefore, you wouldn’t be able to deduct the interest of a withdrawn line of credit that is sitting in your bank account.

2. Depreciation of Assets

There are, in general, three types of costs you need to capitalize and depreciate:

  • The value of the structure, not the land
  • The value of improvements – such as appliances, carpet, windows, countertops, etc.
  • Equipment/Computers/Laptops

These expenses cannot be deducted in a single year, but rather must be spread out (depreciated) over multiple years.

Otherwise, people would abuse the system by claiming $100K in repairs in a single year to remove all tax liability, and then sell the property the next year to recoup their renovation ROI.

3. Taxes

Often the real estate taxes are paid through the mortgage company, and therefore show up on the Form 1098 that is sent from the bank.

If the property is free and clear of any mortgage, CONGRATULATIONS!, but you’ll have to look up your tax records online if you didn’t keep receipts of those payments. Other business-related wage taxes, permit fees, or personal property taxes are considered allowable deductions as well:

  • State, County and City Taxes
  • Social Security Taxes for Employees
  • Medicare and Unemployment Taxes for Employees
  • Personal Property Tax/Vehicle Tax
  • Permit Fees/Inspection Fees

4. Repairs

Repairs are defined as any effort to maintain the current condition of a property or asset.

  • Painting/Spot Patching
  • Plumbing Repairs
  • Air Conditioning Repair
  • Fixture Repairs
  • Labor Costs/Contractors
  • Incidentals related to a repair
  • Rental Fees for Tools/Equipment

5. Maintenance

Maintenance costs are often confused with repairs, however with maintenance, you’re not necessarily fixing anything. For example, the lawn will always need to be cut but it is never really “broken.”

You can also hire a pest company to treat the property every few months to prevent further infestations, even if the original pests are long gone.

  • Landscaping and Tree Trimming
  • Homeowner Association Fees
  • Pool Cleaning, Chemicals and Maintenance
  • Pest Control and Treatment
  • Tune-ups on Lawn Mowers, Chain Saws, Leaf Blowers, etc.
  • Light Bulbs
  • Smoke Detector Batteries
  • HVAC Filters
  • Janitorial Items

6. Insurance Premiums

All business-related insurance premiums are tax-deductible. When trying decide if the insurance is business related, I ask myself, “Would I buy this insurance if I didn’t own a rental?”

I have an Umbrella Policy which covers my personal assets and legal liability above and beyond the coverage on my rental properties. Because of the added risk involved with one of my less-polished properties, I decided to purchase this additional coverage.

I would not have purchased this policy otherwise, and therefore I can classify it, in good conscience, as a business expense.

  • Homeowners Insurance
  • Mortgage Insurance Premiums
  • Fire/Damage/Liability Insurance
  • Flood Insurance Riders
  • Theft Insurance
  • Workers’ Compensation Insurance
  • General Liability Insurance
  • Personal Umbrella Insurance

7. Utilities

You can deduct the cost of any rental property utilities that you pay for. You are still allowed to claim utility expenses even if the tenants reimburse you later, but you also have to claim that reimbursement as income.

  • Electricity
  • Gas
  • Heating Oil
  • Water & Sewer
  • Trash & Recycling

8. Travel Expenses

50% of American Landlords do not live near their properties. Any long distance travel to visit your assets or to conduct rental business can be tax-deductible as a business expense.

  • Airline Fares
  • Car Rentals and Taxis
  • Hotels
  • 50 percent of meal expenses during long-distance travel

9. Vehicles

When expensing business vehicles, the actual asset must be depreciated over multiple years, however the upkeep can be deducted in the year the expense was incurred.

You have the option of deducting actual expenses, or utilizing a standard mileage rate of 56.5 cents per business mile driven (as of 2013).

  • Business Vehicles (depreciable)
  • Mileage or Gas/Maintenance/Usage of Business or Personal Vehicles

10. Management Fees

Even the best landlords need help, if you’ve hired a property manager, like Rental Management One, you are allowed to deduct that expense.

  • Property Management Companies
  • Individual Property Managers
  • On-site Manager
  • Condominium Association Fees
  • Special Assessments

11. Legal and Professional Fees

If you need to hire a pro, be it a lawyer, accountant or tax professional, you can expense the cost. If you ever have to evict a tenant, you can expense all reasonable court and filing fees.

  • Accounting Advice
  • Professional Tax Preparation
  • Tax Preparation Software (like TurboTax)
  • Structural Engineering and Consulting
  • Legal Fees
  • Lease Review and Editing
  • Court Filing Fees

12. Commissions

Occasionally, I will offer a $50 incentive to my current tenants if they find a replacement tenant upon their departure.

  • Commissions to Managers and Salespeople
  • Commissions for Tenant Referrals

A $25K Limit on Losses

According to the IRS, if you or your spouse actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income.

For Example: Lets pretend, you had $60,000 in depreciation and expenses for a given property in a single year, however that property only generated $20,000 in rental income.

This leaves you with a $40,000 loss (ouch!).

You can claim $25,000 of losses that year, but then you are allowed to “recapture” the other $15,000 in losses against your income the next year. If you continue to have losses beyond $25,000 year after year, you can recapture the sum of the unused losses against the gains when you sell the property.

Article written by
Edits in red by Rental Management One
Original Article available here: https://www.landlordology.com/tax-deductions-for-landlords/