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Top 12 Rental Property Tax Deductions & Benefits 2019 [+ Free Worksheet]
The IRS allows you to take tax deductions for any legitimate expense related to running a rental property. If you own rentals, you can claim expenses in 12 categories spanning everything from interest, to insurance, repairs, and depreciation. However, you must record them, according to IRS guidelines.
To ensure you’re taking advantage of all the rental property tax deductions and benefits you qualify for, we recommend using accounting software. QuickBooks enables landlords and investors to keep track of rental income and expenses on a per-property basis easily, making tax season painless. You can save up to 50% for a limited time.
In a hurry? Wish you could download a free worksheet to help make sense of rental property tax deductions? No problem.
In this article, we will discuss some of the tax benefits of rental property. We will break down each category to help you know what questions to ask your accountant. Keeping track of the items below could save you big at tax time. To learn more about real estate investing, read our beginners guide real estate investing.
There are 12 types of rental property tax deductions and benefits.
1. Depreciation: Rental Property Tax Deduction
Depreciation is a rental property tax deduction for the hypothetical wear and tear on your building as if it were an expense. Even though you may not be encountering costs to cover actual maintenance expenses, accounting principles allow you to take advantage of the eventual costs through depreciation.
Determining what the depreciation figure is — and keeping proper records over time — is vital, and you should turn to your certified public account (CPA) or tax professional for assistance. Generally, you can depreciate your rental property value minus the cost of land evenly over 27.5 years, known as straight-line depreciation.
Depreciation Example for Rental Property
We’re going to illustrate a straight line depreciation example that pertains to a rental property.
Let’s assume the following:
- The combined value of the land and the building is $300,000
- The land is valued at $150,000
- The depreciation time frame according to the IRS is 27.5 years
- The property is classified as a residential property. Some portions of commercial property improvements can be depreciated over 15 years.
To figure out the depreciation, you first subtract the land value from the combined value of the land and building. Then you divide the building value by 27.5 years to get the amount of yearly depreciation.
- $300,000 – $150,000 = $150,000
- $150,000/27.5 = $5,454.54 depreciation per year
$5,454.54 is the annual amount you can deduct when filing your rental property taxes. You will do this each year to assess the current home value and the associated annual depreciation.
“The depreciation deduction allows a taxpayer to deduct a portion of the cost of property purchased to produce income as part of a business. From a tax perspective, depreciation of real property is sometimes described as a ‘phantom expense’ because the property can be rising in value while the taxpayer is taking the depreciation deduction.”
― David Reiss, Professor of Law, Academic Program Director, CUBE, The Center for Urban Business Entrepreneurship
2. Mortgage Interest Payments: Rental Property Tax Deductions
Interest on a rental property can take several forms and may be one of a landlord’s biggest tax benefits of rental property. Mortgage interest, points, loan origination fees, interest on credit lines and, in some cases, interest from credit cards used for property-related expenses, may all be deductible.
When you make a loan payment on your rental property, there are two components to that payment. There is a portion going to the principal and a portion going to an interest expense. You can see this by looking at your monthly statement. Unfortunately, you can’t deduct the principal portion of your payment. However, you can deduct the interest portion.
For example, let’s say you have a mortgage or other loan related to the property with a monthly payment of $1,000. Let’s assume $200 is applied to principal, meaning that $800 is interest. Only the $800 is deductible as an expense. Multiply this interest by 12, and you find your annual interest deduction of $9,600. You can keep track of mortgage interest paid, with property management software.
Since the main loans on a rental property are likely mortgages, this is the first interest figure to consider. You can also deduct loan points as a form of prepaid interest. Prior to the 2018 Tax Cuts and Jobs Act, you could deduct interest on home equity lines of credit (HELOC), but now there are restrictions.
Points & Loan Origination Fees
When you obtained financing for your rental property, you probably paid loan origination fees and/or points. Both of those are deductible and can be treated as forms of interest. However, your down payment is not deductible.
Interest on Unsecured Loans for the Property
If you’ve obtained financing in the form of an unsecured loan, specifically used for a given property, that interest may also be deductible. For example, you might have an unsecured loan for the replacement of a roof, that interest may be deductible.
This is an area where you may want to engage the services of your accountant because deductibility for unsecured loans can be tricky ― particularly if the proceeds were used on more than one property or certain amounts used personally. Accurate accounting is vital.
Interest on Credit Cards Used for the Property
You may have also used a credit card for the property and incurred some interest. An example is using a credit card to purchase a refrigerator for your rental property and paying for it over several months, resulting in interest charges. The interest stemming from that purchase would be deductible.
Similar to the situation with unsecured loans, involve your tax professional or CPA if you are trying to deduct credit card interest because it can be tough to track properly.
If you want more information on business credit cards, how they work, and who they’re right for, then check out our guide to the best small business credit cards of 2018.
3. Fees & Tax Benefits of Rental Property
Real estate investors receive rental property tax deductions — deducting related expenses is definitely one of them. Property taxes, licensing fees, and occupancy taxes are three of the most common forms of taxation for rental property, and they’re also deductible. You need to report expenses allocated for the rental property on a Schedule E.
We will now discuss property taxes, licensing fees and other rental property taxes.
Virtually every county or municipality in the country charges property taxes. In rural areas, the amount may be small, perhaps only a few hundred dollars. In some markets, property taxes can be quite high, sometimes up to six figures a year. Rental properties are typically taxed at a higher rate than primary residences.
You can find your rental property tax rate at your county’s office of the assessor or recorder. Sometimes these offices have slightly different names, but you can Google your county and find property tax information on their site as well as a contact phone number. If you have a mortgage on the property, your lender will send you an escrow summary that shows property taxes paid as well.
Many states have licensing requirements for rental property. This refers to a license specifically for the property, not to be confused with a business license for your real estate business, which may be deductible. If you’ve had to obtain or renew a landlord or similar license for the property, that cost is deductible.
Some municipalities require a vacation rental license for short-term rentals, which typically cost around $1,200 the first year and around $600 in subsequent years, depending on the property area and number of bedrooms. For additional information on short-term rentals, check out our guide to buying a vacation rental property.
Occupancy Tax Deductions
Some states charge occupancy taxes on rental amounts, similar to sales tax. This is particularly the case in states where short-term rentals are common. Examples include Florida, which charges a “tourist tax” for rentals less than seven months and multiple areas throughout Arizona. If you are required to pay a tax on rental amounts, that expense is deductible. These taxes vary by state and, sometimes, vary by city, county, or even municipality.
4. Insurance: Rental Property Tax Deductions
Any form of insurance is considered an expense, hence tax deductible for the rental building. This includes basic hazard insurance and special perils insurance like flood or hurricane coverage as well as liability insurance.
- Liability insurance
- Hazard and fire insurance
- Sewer backup insurance which can be added to your hazard policy
- Flood insurance which covers water coming from any source outside the home and is required by most mortgage companies
- Loss of income insurance which can be added to your hazard policy and will cover you in the case of lost rental income
Insurance specifically for a rental property is generally 15% to 20% more than a policy for an owner-occupied policy. The average annual premium on landlord insurance is about $822. This varies, depending on the size, cost, and location of the rental property. For more information, read our article on landlord insurance.
Deducting Umbrella Liability Policies for Rental Properties
If you have other forms of insurance such as a landlord liability policy or umbrella liability policy that covers multiple properties, you will want to seek the counsel of your tax professional or CPA to determine how it should be deducted. One option is to prorate the cost among each property; another possibility may be to deduct it from the overall business entity.
5. Utilities: Rental Property Tax Deductions
If you have to pay for any utilities — gas, electric, or water — they are a deductible expense. If you pay for private trash removal and/or recycling service, those may be lumped in with utilities. In addition, if you pay for communication services like internet or cable/satellite TV for your rentals, those costs are also deductible as a utility expense.
Deductions for various common utilities can be claimed on:
- Heating bills
- Air conditioning
- Trash & recycling
- Internet, television & phone services
“There are a couple of points worth noting regarding utilities. All of the utility expenses are deductible, but the landlord must record a reimbursement, if any, from the tenant as income.”
— Brian J. Thompson, CPA & Real Estate Attorney, Brian Thompson Law
6. Maintenance & Repair: Rental Property Tax Deductions
Costs to maintain, care for, and improve the property are deductible. However, there is a difference between how things like cleaning, maintenance, and repair are deducted vs how improvements are handled.
Cleaning, Maintenance & Repair
These items are considered normal, ongoing items in the operating of the property. They are deductible as normal operating expenses. An example of maintenance might be replacing a few shingles lost to a storm. Normal wear and tear on a property can include replacing worn carpet or repainting rooms with faded paint from sunlight exposure.
Improvements are considered long-term benefits to the property and are depreciated over several years. Some items may be depreciated over five years, others as long as 27.5 years. Using the roof example from above, if it’s the entire roof being replaced, that’s considered a capital improvement and must be depreciated over 27.5 years.
Since the roof has been depreciated, you can’t expense the entire cost in one year. Instead, you would spread the cost out over 27.5 years. So, if the roof was $15,000, you should deduct the same amount each year, according to the IRS, in the straight line depreciation method. This means you would deduct $545.45 each year for 27.5 years.
With improvements, it’s vital to involve your CPA or tax professional. It’s important to classify and compute things correctly, and the recordkeeping responsibility is rigorous.
7. Advertising & Marketing: Tax Benefits of Rental Property
There are two main sources of marketing deductions for a rental property. They include advertising to find tenants to rent the property and lease-up commissions to pay real estate professionals or property managers to rent out the property. Both of which can be tax deductible. For more information on marketing, read our article about how to rent a house.
Any amount you expend to advertise your building, its availability for tenants, or for anything else related to the property like trying to find an on-site manager or contractor are all deductible as normal operating expenses. This includes fees or subscriptions for websites like Zillow where you might list your property for rent.
Tenant Placement & Lease-up Commissions
An often overlooked marketing expense is the commission paid to a real estate agent or property management firm to either secure a new tenant or renew their lease. Because this is often one month’s rent or more, it’s a significant expense well worth recording.
8. Homeowner Association Fees: Rental Property Tax Deduction
If your rental property is located in a community that charges any kind of homeowner association (HOA) fees, condo fees, planned unit development (PUD) fees, and so on, these are deductible expenses. The IRS considers then necessary to maintain the property. HOA fees vary depending on the location, amenities included and size of the unit but the average HOA fees for a single-family home are $200 to $300 per month.
In addition, you may be able to deduct items required by your HOA. For example, some HOAs require expensive for rent signs that meet certain specifications. These sign expenses would generally be deductible.
9. Auto & Travel: Rental Property Tax Deductions
Travel-related tax benefits of rental property are generally categorized in two ways: automobile-related travel expenses and other travel-related expenses. You can deduct the necessary expenses of traveling as long as the trip’s primary purpose pertains to your rental property.
Business use of your car for your rental properties is deductible. If you have to drive to a property to show it, tackle repairs, or otherwise visit the property for a legitimate operational purpose, the mileage is deductible.
Auto expenses can be deducted using the standard mileage method or the “actual” method. For 2019, the IRS set the rate at 58 cents per mile driven for business. The “actual” method uses the percentage of all actual vehicle expenses used for business. Both require you to keep the necessary records. To learn more details about mileage deduction, read our guide on standard mileage deduction.
There are also apps for smartphones that make keeping the records very easy and convenient. You don’t have to write it down or wait until you’re in front of your computer to record your mileage. Instead, you can download the app on your smartphone and keep track of your mileage on the go. To learn more about these convenient smartphone apps check out our guide on the best mileage tracking apps.
Additionally, you may have investment business mileage not attributable to individual properties but, to the business overall, that may also be deductible. Any business-related mileage like going to the office supply store or post office is deductible if documented properly.
Rental Property Tax Deductions for Other Travel Expenses
Aside from using your car, other travel expenses related to your rental property may be partially or totally deductible. For example, if you fly to a property in another state to clean out the building between tenants, that’s legitimately business-related. The airfare would be deductible as would hotel stays meals, rental cars, parking, and tolls.
However, only the business portion of the trip is deductible; you have to prorate that portion, which is clearly business vs that which isn’t. In the above example, if you stayed a week, but only dealt with the property for two days, you can’t deduct all seven days’ worth of meals or hotel costs.
To learn more about properly deducting travel related expenses check out our guide on deducting travel and entertainment expenses.
10. Supplies: Rental Property Tax Deductions
The supplies category is somewhat a miscellaneous one that can include anything from hardware to office supplies. Many supplies will be directly used on a given property and deductible to the property itself. An example might be driveway sealant if the can was used on just the one property.
Other supplies might be applicable to several or all of your properties and deductible to the business as a whole. An example might be computer printer paper, which can’t be allocated to a single property but is used for anything related to the business.
Typical supplies related to your rental property include:
- Printer ink, which can be expensive at an average of $13 per ounce
- Printer paper, folders, binders, and receipt books to stay organized
- Maintenance supplies like paint, spackle, primer, and brushes
- Cleaning supplies like buckets, mops, vacuums, and cleaning solutions
- Building supplies like sheetrock, nuts, bolts, and plywood
- Hardware including locks and keys, which can add up if you change them after each tenancy; locksmiths often charge upward of $125 to change locks
11. Property Management: Tax Deduction for Rental Property
Property management can be performed in several ways. You may be handling it yourself, engaging a property management firm, or hiring a property manager. Each is handled differently from a tax standpoint. Property management fees generally range from 7% to 20% of the gross monthly rental income depending on the type of property.
Tax Benefits of Rental Property You Manage Yourself
Whether you can deduct any of your personal management depends on how you’ve structured your business. If your properties are owned by you personally like a sole proprietorship, it’s tricky to deduct the cost of your own management. The better you substantiate your active management, the more likely you’ll be able to demonstrate your active engagement.
If you have an entity like an LLC or corporation, there may be the possibility of the company employing you as a property manager, which means your salary will be a deductible expense. In that case, you can deduct property management software for things like marketing your property and tenant screening.
Tax Deductions If You Engage a Property Management Firm
Fees that you pay to a property management firm for their services are deductible. Be aware, however, that things like commissions for tenant placement should be noted as marketing and not management.
Tax Deductions If You Hire a Property Manager
Real estate investors with large multi-unit properties or apartment buildings will often hire on-site property managers. Salaries and any benefits paid to these managers are fully deductible rental property expenses.
12. Legal & Professional Fees: Rental Property Tax Deductions
Professional services like accounting and legal work are deductible expenses. Generally, these will be applied overall to your real estate investment business. However, if there is work clearly applicable to certain properties, then the expenses are deductible for the properties themselves. These professionals are often able to identify additional tax benefits of rental property for investors.
Some examples of professional and legal fees may include:
- Legal work to prepare LLC entity
- Legal review or preparation of lease documents
- Bookkeeping services
- Tax filing preparation
Tax Benefits of Rental Property — Beyond The Basics
In addition to the basic tax deductions for rental property, there are other tax issues worth noting. They are related to rental property losses, FICA, or self-employment tax, capital gains, and what’s known as depreciation recapture.
Properties showing a loss offer the most tax benefit, although you should be aware of two things. First, losses are limited to $25,000 in any year, although you can carry over any excess losses into future years. Second, any tax savings stemming from a rental or any other business loss only end up being a portion of what was expended.
FICA & Self-employment Tax Benefits
One of the biggest withholdings you have in your paycheck is for Social Security, known as FICA; if you’re self-employed, you know this as self-employment tax. Depending on how your business entity is structured and what the financial situation of the properties looks like, you may be able to avoid paying some or all of the FICA or self-employment tax.
Depending on the situation, that can save you from approximately 7.5% to upward of 15.3% of the profits derived from the properties. For more information on FICA, check out our helpful FICA guide.
Capital Gains Taxes vs Taxes on Ordinary Income
If you sell a property at a profit, chances are you will be taxed on that profit. If you sell after owning it for more than a year, it will most likely be capital gains tax, not ordinary income tax. However, if you sell the property within a year of purchasing it, you’re usually taxed at your ordinary income tax rate.
Currently, capital gains tax rates run from 0% to 20%. That’s compared to income tax rates that range from 10% to 37%, so it’s a substantial tax savings. For more information on taxes specific to flipping houses, read our guide to house flipping taxes.
“By investing in property in an appreciating marketing, you gain the benefit of compounded growth over time without having to pay taxes as-you-go on your gains. When you do eventually sell, there are some additional strategies for deferring tax, or you can choose to take your profits and pay taxes at the preferential capital gains rates.”
— Steven E. Clem, CPA, Clem Collaborative
Unfortunately, depreciation is a bit of a double-edged sword. At the outset of ownership, depreciation provided a tax benefit. However, when you sell, it creates a taxable amount through what’s called depreciation recapture. In short, a portion of the depreciation you’ve taken through the years will be taxed as part of the gain on the sale.
What’s important to note here is that most investors are not even aware of depreciation recapture, but it can wield a big tax bite upon sale. It’s one of the main reasons to have a tax advisor or CPA handle the tax strategy for your rental properties.
Special Tax Situations Involving Investment Property
There are many special-case tax situations worth learning about. While they may not end up being part of your investment landscape, knowing about them can give you access to even more rental property tax deductions.
Rental Property Tax Deductions of Owning Vacation Home
If you have a second home or vacation property that you sometimes rent out, account for it as a rental property for the period of time you are leasing it. That means you may be able to write off things like advertising, rental commissions, part of the insurance, prorated repairs, and so on.
That will help offset the income generated by the rents and might mean a fairly hefty tax deduction at the end of the year.
Keep in mind that as of 2018, the maximum interest deduction limit on vacation homes and primary residences is $750,000. A vacation property is generally considered a rental property if it’s rented for more than 14 days a year. This is another area that can be tricky when calculating deductions, so it’s best to consult with your tax expert to receive the most tax benefits of rental property.
Historic Tax Credits
If your property is a qualified historic property, you might be entitled to take a historic tax credit. Historic tax credits are available at the federal level, and many states like Ohio and Massachusetts also have programs. These may apply to both the building’s renovation and/or the operation of it as a rental.
Tax credits are a bit different than tax deductions. Whereas tax deductions come back to you as a portion of the effect of expenses, tax credits are dollar for dollar. In other words, spend $1 on renovations, get $1 reduction in the taxes owed.
State or Local Tax Incentives
In addition to historic tax credits, your state or municipality may have economic development tax credits for buying, fixing up and operating property in lower-income areas like this example of Detroit. Governments use economic development tax credits to encourage people to purchase in these areas so they will eventually be improved.
“A big mistake is simply failing to keep good documents. It seems elementary, but the first thing we do when we onboard a client is to train them on how to keep good records. We can give you all of the tax strategies in the world, but if you can’t maintain good records, our strategies will be pointless under an audit.”
— Brandon Hall, Founder & CEO, The Real Estate CPA
3 Types of Property Ownership That Affect Tax Benefits
The business structure you choose for your rental properties will affect what deductions you can take and how you approach them. These deductions vary whether you hold your properties as a sole proprietorship, partnership, or corporate entity. Read more about starting a real estate holding company.
The three types of property ownership that affect tax benefits include:
- Sole proprietorship
- Corporate entity
In particular, there are tax deductions that are directly tied to the rental properties themselves. These are known as Schedule E deductions. There are others that can be attributed to an overall business that runs the investment business, known as Schedule C deductions. The type of business entity you select will govern, to a great degree, how much of the latter kind of deductions you can take.
Since the creation of the 2018 Tax Cuts & Job Act, each of the three entities is now entitled to a new pass-through tax deduction as long as the rental activity qualifies as a business for tax purposes. You will be able to deduct 20% of your net rental income. Basically, you will pay taxes on 80% of your net rental income, instead of 100%. This can get complicated if you have employees or if your annual taxable income exceeds $415,000 for married couples filing jointly.
Frequently Asked Questions (FAQs) About Rental Property Tax Deductions & Benefits
Hopefully, this guide answers your questions about the tax benefits and deductions regarding rental property. If not, here are some frequently asked questions that we’ve encountered. If you have additional questions about rental property deductions and benefits, feel free to ask them in the Fit Small Business forum.
1. Can You Write Off Property Taxes in 2019?
The IRS says you can deduct local and state property tax as long as you paid the tax in 2018. However, if you were assessed the tax but did not pay the bill until 2019, you will not be able to use the expense as a deduction until the following year.
2. Is the Purchase of Rental Property Tax Deductible?
The purchase price of a rental property itself is not tax deductible. However, a few of the costs associated with the purchase may be. For example, prepaid interest, loan points, and property taxes are eligible deductions. Also, you will be able to start your depreciation deduction after purchase.
3. Is Painting a Rental Property Tax Deductible?
Painting your rental property both on the interior and the exterior is a deductible expense as it is necessary to keep the property in good working order. In some cases, painting could be considered an improvement and would need to be depreciated. For example, if you’re painting an addition and increasing the property value.
4. Can I Write Off Lost Rental Income?
Rental losses can be written off as long as you have passive income. Passive income is generally earned from other rental properties or from businesses where you are not actively participating. You cannot offset the loss with income from your salary. If you don’t have passive income, you can carry forward your losses until you have passive income or sell the property.
5. Are Appliances for Rental Property Tax Deductible?
Purchasing appliances is a rental property deduction and typically taken as an improvement and depreciated over several years, not in the year the appliance was purchased. However, since the new IRS section 179 rules were implemented in 2018, many business owners are deducting the full amount in the year purchased.
6. Can You Deduct Mortgage From Rental Income?
One of the best tax benefits of rental property is the interest tax deduction. In addition, investors can deduct the property tax and the property insurance that may be part of the mortgage payment. However, the entire mortgage payment includes principal reduction, which is not deductible.
Real estate investors have access to an abundance of rental property tax deductions. Depending on how you hold the properties, you may be able to deduct expenses directly related to running the properties along with deducting expenses related to the overall business entity. Tax laws for rental property are complex, and it’s advisable to use a tax professional or CPA.
SOURCE: SOURCE: REMMOMT.COM