What Are the Best Rental Property Tax Deductions
As the deadline for tax season draws closer, it’s vital that rental property management companies find ways to reduce their tax burdens. Taxes are a large portion of a property management company’s expenses, and finding rental property tax deductions can provide a noticeable windfall for some organizations (or help to minimize the IRS bill for others).
However, as complicated as the tax laws are, it often takes the service of an expert tax attorney to get the best rental property tax deductions and not get audited. In fact, it is strongly recommended that you find a tax attorney to walk you through the list of “rental property tax deductions 2018” since they’ll know the best deductions to take and how to maximize your return.
While the team here at HOMEE aren’t tax experts, we took the time to compile some useful property tax deductions that property management companies can benefit from:
1: Tax Deductions for Interest Payments
From mortgage loan interest payments to credit card interest, from expenditures made to acquire goods and/or services for the rental property management business, there are a few types of interest that property management businesses can claim on their taxes. As noted by Nolo.com, “Interest is often a landlord’s single biggest deductible expense.”
So, taking deductions for interest paid on a real estate loan for a rental property is a major item on any rental property tax deductions checklist. However, it should be noted that there is a ceiling to the tax deductions that can be claimed for rental properties. As noted by Nolo, “the Tax Cuts and Jobs Act limited the interest deduction for landlords who earn more than $25 million from their rentals.”
Real estate loans aren’t the only form of interest you can deduct, either. The IRS’ business deductions page lists business interest expenses, or “the amount charged for the use of money you borrowed for business activities,” as a deductible expense.
2: Tax Deductions for Municipal & State Property Taxes
As noted in one TurboTax article:
“Some states, cities and counties assess property taxes on various types of property you own that produce income, such as tools and other equipment. Every local district has its own list of what type of property is taxed and specifies how taxpayers should determine the item's taxable value.”
Basically, for some income-generating properties, such as rental properties, there are additional taxes that may be assessed beyond the federal income tax paid on the revenue generated. Some of these property taxes are actually deductible—to a limit of $10,000/year, according to TurboTax.
While an interesting deduction (deducting property taxes from your overall taxes), it should be noted that there are caveats to what kind of “property taxes” can be deducted. As noted in the TurboTax article, fees for the delivery of services “such as water, or trash collection” aren’t deductible. Neither are “flat fees to satisfy fines,” nor “assessments for local benefits, such as a charge to construct a sidewalk outside your house.”
If you’re considering taking this kind of rental property tax deduction, it’s important to consult a tax expert to verify what you can and cannot claim.
3: Tax Deductions for Repairs
Did a toilet spring a leak? Did a window break when a neighborhood kid threw a wild fastball? Was it time to freshen-up the peeling paint this year? If so, there’s good news: you can probably claim these repairs as a deduction on your taxes.
Nolo notes in their article that “The cost of repairs to rental property (provided the repairs are ordinary, necessary, and reasonable in amount) are fully deductible in the year in which they are incurred.” So, for any ordinary repair job that crops up during the year (and minor repairs are a constant necessity), there is a chance to recoup some of that in your taxes.
However, it is important to note that these deductions are for repairs, not improvements. If the repair could be considered an upgrade, that may affect your ability to claim it as a tax deduction. As noted by the IRS.gov website, “You may not deduct the cost of improvements. A rental property is improved only if the amounts paid are for a betterment or restoration or adaptation to a new or different use.” You may want to review your repairs with a tax attorney to discuss whether they count as repairs or improvements—especially if the repairs included an upgrade like replacing a broken single-pane glass window with an energy-efficient double-paned window.
Money spent on improvements is covered under depreciation instead of a straight tax deduction.
4: Tax Deductions for Hiring Contractors and Employees
Expenses related to employee pay can be deducted from a property management business’ taxes at the end of the year—as can retirement plan contributions made by the company (such as a matched 401k). As noted on the IRS.gov business deductions page cited earlier, “You can generally deduct the pay you give your employees for the services they perform for your business.”
However, it isn’t only your internal employees that you can deduct on your taxes. If you hire an independent contractor (IC) to perform work related to your rental property management business, such as renovations, you can deduct their pay from your taxes as well. It is important to remember that, as Nolo states in their article on deducting independent contractor salaries, if you pay an independent contractor more than $600 during the year for services related to your rental property management, “You need to obtain an unincorporated IC’s taxpayer ID number and file a 1099 form with the IRS.” When determining whether you’ve hit the $600 threshold, you should include the cost you were charged for any parts and materials the independent contractor used to complete their services.
5: Tax Deductions for Insurance Costs
Insurance is an integral, and often costly, part of running a rental property management company. There are many forms of insurance that a rental property manager might need, including:
- Business personal property insurance (fire, theft, flood, etc.).
- General liability insurance.
- Workers’ Compensation insurance.
- Professional liability insurance.
- Employee health insurance.
Basically, property management companies need to have multiple forms of insurance to cover themselves, their properties, their customers, and their employees. Thankfully, insurance is considered a necessary business expense by the IRS, so it makes the rental property tax deductions checklist.
These are just a few of the rental property tax deductions for which your business might be eligible. As a reminder, if you haven’t already, consult a professional tax attorney in your area for more advice regarding the claiming of tax deductions.