Landlords have always enjoyed tremendous benefits from owning rental property. Nearly all of their expenses, such as mortgage interest, can be deducted, because owning investment property is treated the same as owning a more traditional business.
As we head into prime time tax season, it's important for landlords to understand the various tax write-offs available to them. Wondering how recent tax reform impacts rental property owners? We'll talk about that, too. Here are 6 tax deductions for rental property owners to take advantage of in 2018.
Most people know that they can write off mortgage interest on investment property. That's typically the single largest tax write-off. However, landlords can also write off any interest incurred on credit cards, lines of credit, and other loans used to acquire, improve, or perform activities related to the property. For instance, if you hosted a holiday party for residents this year and put the tab on your business credit card, you can write off that interest, too!
Depreciation is a tricky concept for some people to understand. After all, homes tend to appreciate in value, so why would you get to write off depreciation?
Here's what you need to know: The IRS considers residential real estate to be a depreciating asset. The building's "useful" life is 27.5 years. This means you can write off a 1/27th of the building each year. In order to do that, you must separate out the value of the building from the value of the land. Your tax assessor's database should give you an idea of the value of each of those components, as would an appraisal or an insurance agent's cost estimate of the building.
More sophisticated real estate investors might want to consider doing a cost segregation study. A cost segregation study allows you to accelerate depreciation for some aspects of the property ahead of others. For instance, personal property such as furniture, carpets, fixtures, window treatments, and appliances can usually be fully depreciated over a 5-year or 7-year period. Land improvements such as sidewalks, paving, fences, and landscaping, can usually be depreciated over a 15-year period. The remainder of the building is depreciated over the full 27.5-year period. Cost segregations are much more nuanced, but it's important to understand the benefits of doing a cost segregation study, particularly if you want to put more money back into your pocket on the front end of owning a rental property.
Any travel related to the property, like taking a trip to a Home Depot located 30 miles away, can be written off on your taxes. Investors can even write off travel related to searching for a potential investment property, such as a trip needed to evaluate an out-of-state opportunity. There are some restrictions to this—for instance, at least half of the time spent on that trip must be related to evaluating the investment opportunity. Just be sure to keep detailed records that log your travel expenses.
Anytime you pay someone to perform services related to your property, you can deduct their wages or fees as a business expense. This is true for both landlords and homeowners associations. As always, you'll want to keep receipts. Even if you're just paying a neighborhood kid to shovel the driveway for $50 a pop, write up a simple receipt and keep a copy for your records.
Landlords, property managers, and homeowners associations can all write off professional services incurred in the course of running the business. This includes any fees paid to your attorney, accountant, management company, and investment advisors. Soft costs like these are considered operational expenses, and are a requisite part of doing business. Be sure to write them off accordingly.
Did you launch a new website this year? Maybe you printed new signs for the front of the property highlighting available units. Whatever the case may be, those costs can be deducted on your taxes. Any advertising, whether for your business or for a specific property, can be written off as a business expense. This includes ads placed in newspapers, postage for mailers, or even the fee you paid to participate in a local real estate development panel. Too often, property owners, managers, and HOAs consider these costs just a routine "part of doing business" and forget to write them off, but these costs add up.
As we head into tax season, it's important for landlords, property managers, and homeowners associations to really understand the full breadth of tax write-offs available to those who own or operate investment properties.
You might want to consider hiring an accountant to ensure that you're taking advantage of all of these tax deductions. However, an accountant can only help you so far as you have the proper receipts, bank statements, and documentation to support these write-offs.
If you struggle to track your expenses, it might be time to hire a property manager. An experienced property manager should be able to systematize the process for you so that each year, you fly through tax season with ease. When you're ready to find a property manager, Halby will be here to help.