If you purchase a rental property, you will have to pay property taxes. This is critical for any local government to provide infrastructures like roads and schools. Knowing what is tax-deductible when you file your tax return will ensure that you don’t pay more than you have to. As such, it’s essential to deduct everything you can when the tax bill comes each year.
Wise real estate investment means getting the most profit from each investment you make. Your return on investment (ROI) should be the driving force of any financial decision. How much you pay in taxes each year is a critical factor in rental property ROI.
Read on to learn about some of the rental property tax deductions you might want to consider in 2022 and beyond.
11 Rental Property Tax Deductions To Consider
The following are the best tax deductions to keep in mind when it comes to rental property.
Properties deteriorate over time from the daily wear and tear from their occupants and the outside elements. Depreciation measures the decreasing value of the property as it deteriorates over time.
Depreciation is also a term used by the IRS to describe the rule that property owners must write off some of the value of their rental properties each year to account for the declining value until the value is zero and you have deducted the total cost. This applies to the original building you purchased as well as any improvements or additions you have made. It does not apply to the land the building sits on.
Depreciation rates vary depending on what part of the property you claim depreciation on. The building depreciates over 27.5 years. Fences, landscaping, and driveways depreciate over 15 years. New appliances, flooring, and furniture depreciate over five years.
You can begin to claim depreciation the first day you start renting your property. So, if you buy a rental property that needs repair before renting, you can’t start claiming depreciation the day you buy it. However, you can deduct the costs for maintaining the rental property while making capital improvements.
2. Business Income
If you own your rental property with an LLC, you can deduct your qualified business income (QBI), which is also sometimes known as the “pass-through” deduction. The LLC income passes through to the owner, and they are taxed on their personal tax return instead of the tax return of the LLC.
This deduction is in place to avoid double taxation. Without it, the LLC would be taxed on its taxable income from the rental property, and the owner would be taxed again when they pay their personal taxes.
3. Professional Services
Running a rental business can be a complicated endeavor. Acquiring rental property, selling rental property, managing tenants, maintaining buildings, filing paperwork, and calculating your monthly income and expenses can be too much for one person to handle. Luckily, there are professionals that can help you with all of the tasks associated with a rental property business. Read on to learn about some of the professional services you can submit as tax deductions.
Real Estate Agents
Having a good real estate agent is essential for a successful investment property business. They understand the local markets and can advise intelligently on which properties are suitable investments.
They don’t do this for free, though. How do real estate agents get paid? They take a commission when they help buy or sell properties for their clients. The seller usually pays this commission, and it’s considered a rental business expense you can deduct.
Real estate agents don't always get paid on a commission basis, though. Sometimes they can charge specific fees for specific services. For example, some real estate listing agents will charge you a flat fee for listing your property to sell in the multiple listing service (MLS). The MLS is the online system where real estate agents list properties. It feeds information into consumer-facing home search websites.
Regardless of whether you pay a real estate agent a flat fee, by the hour, or on a commission basis, the money you pay for their services is deductible expenses.
Buying rental properties involves a lot of legal paperwork. Letters of intent, contracts, addendums, and disclosure documents are just a few examples. Rental property owners can deduct legal fees from their property taxes as well.
Having a real estate lawyer review these documents to ensure they are legally accurate and represent your best interests is a good idea. It can also cost you a pretty penny. Getting some of that money back during tax time eases the pain.
If you wonder who the best person to talk to about rental property tax deductions is, it’s a tax professional. They can walk you through the tax benefits for your business and offer tax advice for your personal filings as well. This includes helping you understand the many tax deductions for landlords, how they work, and which ones apply to your rental business.
Tax rules are complicated, so having a professional walk you through the tax code and all of its intricacies is a great resource to have on hand. While tax returns can be done without the use of professional services, it's a good idea to use one if you have rental properties. Filing taxes on investment properties is much more complicated than filing your personal taxes. Fortunately, the fees you pay to tax professionals are considered a rental property tax deduction.
A certified public accountant brings a wealth of benefits to a rental property management business. They can help calculate all of your income, like monthly rent and maintenance fees. They can also help calculate your expenses to see how much net profit you make each month.
In addition, an accountant can help you prepare for paying taxes by making sure all of your financial statements are in order, so you aren’t caught off guard when it’s tax time. The fees you pay to an accountant for all of this work can be deducted from your rental property taxes.
Managing your rental property isn't easy, especially if you have a lot of units. Duties include collecting rental income from tenants, managing operating expenses, overseeing the work of independent contractors, responding to tenants' requests…the list goes on and on. For some people, this is manageable on their own, especially if they use tools like a rental property management software system.
However, if you have no desire to be a property manager or your amount of properties makes it impossible, you should hire a property management company. They will take care of all of these tasks for you, and the property management fees you pay are tax-deductible.
If you have a large number of rental properties and a high rental property income, you may be able to afford to hire full-time employees. At the very least, you will likely need a list of independent contractors to handle things like snow removal, landscaping cleaning, and other services. The money you pay for these services is a deductible expense.
When you own rental properties, you find out quickly that sometimes things deteriorate and break. Faucets, furnace air conditioners, kitchen appliances, and all the structural parts of the building are just a few of the things you need to keep an eye on. Maintaining all the various parts of your investment property can be costly, but luckily the costs are tax-deductible.
It’s important to note that your work to improve the property that adds value is not deductible. For example, adding a garage to a rental property would not be deductible, but repainting the building would be.
5. Mortgage Interest
You are probably familiar with rental property loans if you are a rental property owner. The main types include conventional, government, and seller-financed. All three of these loan types have many differences, but the one thing they all have in common is mortgage interest. Ask your lender for a 1098 form early in the year, that will tell you exactly how much mortgage interest you paid the previous year. Doing it early in the year gives you time to get the information and crunch the numbers before you submit your taxes. This is one of the most significant rental property tax deductions you can take.
6. Insurance Premiums
All rental properties need to have insurance. You pay a premium every month for protection in case something happens to your investment. You can deduct the premiums you pay to cover adverse events like a fire or tornado from your taxes. In addition, if you pay for your employees’ insurance through your rental property business, that can be deducted too.
The landlord or the tenants can pay rental property utilities. They can be split between them as well. Many rental property owners pay for water but have their tenants pay for electrical and gas. All of the utilities you pay for as the owner can be deducted. The utilities your tenants pay for can’t.
Save those receipts when you go to the office or hardware store. Supplies for your business like tools, paper, printers, and other things you need to keep your business running can be deducted from your taxes.
Keeping your property full of tenants is essential for keeping the rental income flowing. That means when you lose a tenant, you have to find a new one. Advertising, in its many forms, is the best way to accomplish this. It’s also a cost you can deduct from your rental property taxes.
Transportation expenses related to your rental property businesses can be deducted from your taxes as well. This can be a significant amount of money if you own many different properties that you need to travel to and from. A trip to purchase tools or responding to a tenant complaint are good examples of travel expenses that should be deducted.
11. Office Space
Even if you work from home, the office space that you use to conduct rental property business is tax-deductible. This includes utilities and internet service as well. Only the space you use for your office can be deducted, though. So, if you work from home, you can’t deduct the whole home mortgage, but rather a percentage related to the square footage of your workspace.
Running a successful rental property business means increasing profits and minimizing expenses. That means you need to save as much money as you can at every turn. Use the rental property tax deductions found here to save yourself some cash when tax time comes around.