10 Ways Landlords Can Reduce Taxes – Part 1

Part 1 – 10 Ways Landlords Can Reduce Taxes

Most landlords focus on reducing expenses in order to increase profits. However, many do not focus enough on how to reduce taxes to increase the amount they keep as spendable income. However, fewer landlords are aware of the range of tax breaks available to property owners. These are opportunities that could help you increase the amount you keep in your pocket. Tax planning is important to your overall wealth and landlords need to spend more time on understanding how to benefit from the deductions that the government legally allows.

Here are 10 deductions that could help you during tax season. While some of these tax breaks apply to all homeowners, many are unique to rental property. This is not an all inclusive list but just some ideas. Make sure to check with your tax professional or CPA to determine whether any other tax deduction applies to you and your situation to make the most out of your return.

Mortgage Interest

Most people buy their rental property with some sort of third party financing and therefore you have a mortgage on the property and paying interest to a bank. Landlords can deduct their mortgage interest as a rental expense (see SmartAsset for a more details). Landlords can deduct their mortgage interest as a rental expense. This deduction applies to all homeowners and landlords. Still, it’s especially important for landlords to use because it’s usually the biggest deduction they can claim.

Property Taxes

This deduction is applicable to both the homeowner and landlord and can really benefit since usually quite a large deduction. You can deduct the county, city and local property tax paid in the year of the corresponding tax year. Many times your end of year 1098-INT from your lender will contain the amounts you paid in property taxes. If not, you can also usually look this up at the county or city treasurer.

Depreciation

Depreciation is a deduction you can take for property and items that you own for over one year. The cost of qualifying items are deducted in small amounts over a set number of years. For example, rental properties are depreciated over 27.5 years. This means that you can deduct about 1/27 of your rental property annually. Depreciation is required by the IRS (so make sure you include since the IRS may charge you a recapture tax even if you did not claim any depreciation). Depreciation reduces your overall tax bill. However, when you sell the property you have to recapture your depreciation (see qualified CPA for advise).

Insurance

Rental or landlord insurance is deductible on your taxes. This includes fire, wind, hail, theft, and flood insurance for your rental property and liability insurance. If you have employees, you can also deduct the cost of their health and workers’ compensation insurance.

Operational Expenses

Many items that you purchase for your rental property throughout the year can be classified as operating expenses and deducted in the year during which you purchase them. The IRS has more details and “Tips on Rental Real Estate Income, Deductions and Recordkeeping.” These are ordinary and necessary expenses for “managing, conserving and maintaining your rental property”. Appropriate expenses that are generally accepted as necessary for a rental business might include advertising a property for rent, maintenance of the house, utility expenses, and small repairs.