Real Estate Tax Deductions

07/05/2019

20 Tax Deductions for Landlords

The billionaires of the world are not doctors or lawyers, they're entrepreneurs. Specifically, they are people who started their own businesses, whether those businesses are online, brick and mortar, or real estate empires.

Starting and owning a business provides a long list of tax advantages, and real estate investments provide all the usual tax advantages plus some extras unique to real property. Every expense associated with rental properties - plus some just-on-paper expenses - are tax deductible.

However, tax laws change fast and that means it is imperative for all those who invest in real estate must educate themselves. So, before you jump into the rental property deductions checklist, make sure you're up to speed on how the new tax law affects landlords' tax returns.

The changes in the Tax Cuts and Jobs Act of 2017 (TCJA) impacted homeowners, real estate investors and landlords alike. Here's an outline of what you need to know as a real estate owner, and when in doubt, hire a professional who knows accounting with a real estate investing focus. Ideally one who invests in real estate themselves.

Changes to the Home Mortgage Deduction in 2017

Lower Income Tax Rates

No Self-Employment Taxes for Landlords

New Passive Income Loss Rule

20 Tax Deductions for Landlords

1. Losses from Theft or Casualty

2. Property Depreciation:

3. Repairs & Maintenance

4. Segmented Depreciation

5. Utilities

6. Home Office

7. Real Estate-Related Travel

8. Closing Costs

9. Mortgage Insurance (PMI/MIP)

10. Property Management Fees

11. Rental Property Insurance/Landlord Insurance

12. Mortgage Interest

13. Accounting, Legal & Other Professional Fees

14. Tenant Screening

15. Legal Forms

16. Property Taxes

17. Phones, Tablets, Computers, Phone Service, Internet

18. Licensing Fees

19. Occupancy Tax

20. Business Entity Pass-Through Deduction

Home mortgage interest remains deductible up to $1,000,000, for loans that settled before December 15, 2017.

Home mortgage debt incurred after December 15, 2017 is only deductible up to $750,000. Mortgage interest on rental property loans is unaffected by the TCJA.

Another change worth mentioning is the tax deduction is no longer available on HELOC's (Home Equity Line Of Credit) as of tax year 2018.

Lower Income Tax Rates

From 2018 through 2025, rental property investors will benefit from generally lower income tax rates and other favorable changes to the tax brackets. The TCJA retains seven tax rate brackets, although six of the brackets' rates are lower than before. Here are the updated regular income rates:

Taxable Income - Single Tax Rate Taxable Income - Married Tax Rate

$0 - $9,525 10% of taxable income $0 - $19,050 10% of taxable income

$9,526 - $38,700 $952.50 plus 12% of the amount over $9,525 $19,051 - $77,400 $1,905 plus 12% of the amount over $19,050

$38,701 - $82,500 $4,453.50 plus 22% of the amount over $38,700 $77,401 - $165,000 $8,907 plus 22% of the amount over $77,400

$82,501 - $157,500 $14,089.50 plus 24% of the amount over $82,500 $165,001 - $315,000 $28,179 plus 24% of the amount over $165,000

$157,501 - $200,000 $32,089.50 plus 32% of the amount over $157,500 $315,001 - $400,000 $64,179 plus 32% of the amount over $315,000

$200,001 - $500,000 $45,689.50 plus 35% of the amount over $200,000 $400,001 - $600,000 $91,379 plus 35% of the amount over $400,000

$500,001 or more $150,689.50 plus 37% of the amount over $500,000 $600,001 or more $161,379 plus 37% of the amount over $600,000

In addition, the new tax law retains the existing tax rates for long-term capital gains.

No Self-Employment Taxes for Landlords

In many ways, landlords get the best of both worlds: the tax benefits of owning a business, without the downside of self-employment taxes.

Real estate flippers can sometimes fall under the "dealer" category, and find themselves subject to double FICA taxes. FICA taxes fund Social Security and Medicare, and cost both employees and employers 7.65% of all income paid. Self-employed people end up having to pay both sides of FICA taxes, at 15.3% of total income.

But the Tax Cuts and Jobs Act of 2017 ended up leaving landlords and their rental income free from any FICA taxes.

New Passive Income Loss Rule

If you have losses from "passive activities" such as owning rental properties, typically you can only deduct those losses to offset other passive income sources, such as other rental properties. For example, if you earn $10,000 from one rental property and have an $8,000 loss on another, you can offset your $10,000 income with the $8,000 loss, for a net taxable rental income of $2,000.

But if you have a net loss, that can't be used as a deduction against your active income from your 9-5 job. You can carry it forward however, to offset future passive income earnings and rents.

Here's how the  changes matters: there's a new $250,000 cap for single filers, $500,000 cap for married filers, for passive losses. Any passive losses that you're allowed, in excess of those caps, must be carried forward to the next tax year.

It won't affect most landlords, but it's something to be aware of.

Here are 20 rental property expenses you can deduct on your tax return, to keep more of your money in your pocket where it belongs. It's not 100% exhaustive, as there are a few obscure tax deductions that only apply to a few landlords, but think of this as a rental property deductions checklist for the average landlord.

IMPORTANT: These rental property tax deductions are "above the line" deductions, meaning they come directly off your taxable income for rental properties. That means you can deduct these expenses, and still take the standard deduction.

1. Losses from Theft or Casualty

The TCJA suspended the itemized deduction for personal casualty and theft losses for 2018 through 2025. Before 2018 deductions of this kind were permitted when they exceeded $100.

But landlords can still deduct losses from theft or damage to their rental properties, as business expenses.

2. Property Depreciation:

This is a handy "paper expense." Much of the cost of buying your property can be written off as a tax deduction, although it must be spread over 27.5 years (don't ask me where that number came from). Buildings lose value as they age (at least theoretically), so the IRS lets you deduct 1/27.5th of the property's cost each year.

Major property upgrades and "capital improvements" must be depreciated as well, rather than deducted in the year you make them. For example, a new roof is a capital improvement that must be depreciated, rather than deducted all at once.

But the patching of a roof leak? That's a repair.

3. Repairs & Maintenance

Basic repairs and maintenance such as new paint and new carpets are deductible for your rental properties. That's not the case for your primary residence, in which repairs are not deductible.

Remember, if it's a large improvement or replacement (like the roof example), it may count as a "capital improvement," in which case you'll have to spread the deduction over multiple years, in the form of depreciation.

The line isn't always crystal clear however, like the roof example above. Here's an example of how it gets blurry: if you replace all your windows to modernize and improve your energy efficiency, it's a capital improvement. If a baseball goes through one window, which you replace, it's a repair. But what if you replaced a few windows last year, but not all?

Talk to an accountant, and build a defensible argument for any repairs you deduct.

4. Segmented Depreciation

Some improvements, such as landscaping and "personal property" inside the rental/investment property (e.g. refrigerators) can be depreciated faster than the building itself. It's more paperwork, to segment the depreciation of certain improvements as separate from the building's depreciation, but it means a lower tax bill right now, not in the far distant, unknowable future.

5. Utilities

Do you pay for gas, heating, trash removal, sewer or any other utility for your rental? They are tax deductible.

Take heed however, these if your tenant reimburses you for a utility, that would be considered income. So you have to declare both the income and the expense, even though they offset each other.

6. Home Office

This is a popular deduction, but it's also one you need to be careful about, as it can trigger audits. You have to set aside a percentage of your home for only doing work/business/real estate investing-related activities, and that percentage of your housing bill can be deducted. And 2018 may see this deduction scrutinized even more.

One new downer: no more home office deduction for those who work for others in the comfort of their home. But as a real estate investor, you're a business owner, so you can still claim it if you sue the space exclusively for "business."

Make sure and talk to an accountant about this, and keep the percentage realistic.

7. Real Estate-Related Travel

Another popular-but-dangerous deduction, you can deduct travel expenses if your travel was for your real estate investing business... and you can prove it. Many people get cute with this one, and when they go on vacation they'll go see one or two "potential investment" properties and then write the entire trip off as a business expense.

Whenever you plan on deducting travel expenses, put together as much documentation as you possibly can so that you can make a strong case that it was an actual business trip. For example, meet with a real estate agent in the area, and keep all of your email correspondence with them. Keep all listing information and investment calculations for any properties you visit. Track your mileage for all driving done to and from rental properties.

8. Closing Costs

Many closing costs are tax deductible, and others can be depreciated over time as part of your acquisition cost. Use an accountant with a deep knowledge of real estate investments, and send them the HUD-1 (settlement statement) for each property you bought last year.

9. Mortgage Insurance (PMI/MIP)

No one likes mortgage insurance (other than banks). At least you can deduct the cost from your taxable rental property income.

10. Property Management Fees

Paid a property manager to handle the headaches for you and field those dreaded 3 AM phone calls from tenants? You can write off their management fees, including both monthly fees and tenant placement fees.