We all know that paying taxes is an unavoidable expense of doing business, so protect the profit margins on your rental property by taking advantage of any and all tax deductions available to you. All of your expenses considered to be ordinary and necessary to run your business are deductible as per the tax code. As the tax laws are continuously changing, make sure you consult a tax professional before filing your return.
Here is a list of some of the most impactful tax deductions:
Interest on Loans
Your rental properties are likely some of the most expensive assets you own. So, unless you own them outright, you’re paying a significant amount of interest for your mortgage. In addition to your mortgage interest, you may also deduct other interest for loans to make improvements or other business-related activities.
You’re allowed to deduct ordinary business expenses for the tax year in which they occur on your annual return. However, the tax code does not permit large capital expenditures to be deducted all at once, those large purchases need to be depreciated over an extended period of time. The tax code allows for the purchase price of your rental property to be depreciated over 27.5 yrs.
Repairs and Maintenance
Any repairs you make to your property are fully deductible for the tax year in which they occur. It’s worth pointing out that repairs are not the same as improvements. For clarification’s sake, a repair is an expense you incur to fix something you already own that is broken and/or is not operating correctly. For example, a burst pipe or a new thermostat for the HVAC system.
Any improvements, or other large purchases, you invest in for your property are not deductible for the year in which they occur. As mentioned above, repairs and improvements are distinctly different. The IRS mandates that capital improvements and restorations be depreciated per guidelines according to their natural, expected usable life. These types of expenditures would include a new roof, laundry equipment, and structural renovations.
Meals & Entertainment
If you meet someone for coffee or a meal to talk about your business, the cost may be tax-deductible. Just be sure your tax preparer knows about the new restrictions about expenses with clients versus staff.
Any business-related book or program you buy probably qualifies as a business tax deduction.
Office Equipment, Services & Supplies
Don’t forget about these! Any application you buy or subscribe to, paper, toner, etc. may qualify as a tax-deductible business expense. Part of your computer/printer and cell phone (both purchase price and monthly service) expenses may qualify.
You can’t expense your drive into work every morning, but you can deduct work-related travel and maintenance. If you have a dedicated work vehicle, you can deduct the payments, gasoline, insurance, registration fees, and mileage. To make keeping a log easier, download an app, like Everlance, Stride, or TripLog to track your mileage and/or travel expenses, many offer a freemium option until you decide to spring for the full package. You have the option to deduct actual expenses incurred or use the IRS standard mileage rate. For 2019, the standard business mileage rate was $0.58 per mile.
Congress enacted the pass-through deduction as part of the Tax Cut and Jobs Act in 2018. It is currently set to run through the end of 2025 unless re-enacted by Congress. This generous deduction allows you to deduct 20% of your income or 2.5% of your investment PLUS 25% of employee wages. Pass-through businesses are ones in which the business entity pays no tax, but instead the earnings “pass-through” to the owner(s) who pay the taxes on the personal tax returns. To meet the requirements of the pass-through deduction, you must operate your business through an approved legal entity such as a: sole proprietorship, S-corp, limited liability company (LLC), limited liability partnership (LLP), or partnership.
Small business owners and DIYers often devote space in their home for use as a home office. If you use the space primarily for conducting business, you can deduct associated expenses. The tax code permits you to write off prorated expenses for the mortgage interest, insurance, taxes, maintenance, and utilities.
Overall, be careful about proper documentation to keep your personal and business expenses separate. This can be as easy as using one of your personal credit cards ONLY for business expenses. Otherwise, you may be increasing your chances of an IRS audit.
Operating a DIY rental business is difficult enough without the IRS taking their chunk every year, you need all the breaks you can get. Luckily, by running your rental business, you are authorized to benefit from these and many other tax deductions, but it’s vital to keep accurate records for all business transactions. It’s worth reiterating, tax laws are updated frequently and often without much attention. Always review your deductions with a CPA or tax attorney to make sure you still qualify.