10 Ways Landlords Can Reduce Taxes – Part 2

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Capital Expenses

There are 2 different types of expenses (based on tax rules) that are incurred with respect to a rental property are below:

1. Capital expenses are defined as purchases that are expected to last more than one year and generate revenue in the future. This might include equipment, land, or vehicles, but keep in mind these are not the only capital expenses. Such purchases are treated as investments by the IRS and must be deducted (or capitalized) over a number of years.
2. Current expenses are the day-to-day operational expenses that keep your business running, such as rent and utilities. You can deduct 100% of current expenses from your gross rental income in the year they are incurred.

Nolo offers some more detailed information for understanding how landlords can deduct long-term assets like rental real estate.

Personal Property Tax

You may be required by your local government to pay personal property taxes on equipment and furniture used for business purposes and is based on the value of the property. For example a computer would be considered personal property for business. Most landlords are not aware that they can depreciate their personal property at a faster rate than the 27.5 years for the property itself. For example, appliances can be depreciated over a five-year period. However, appliances that cost less than $5000 qualify to be expensed. Other items, like fences are typically depreciated over 15 years. There are many changes and nuances so make sure you find a qualified accountant. See the IRS rules for all the details.

Legal and Professional Services

Often a landlord’s worst nightmare, eviction proceedings are extremely stressful and you may be forced to evict or take legal action against a tenant. However, you can deduct court fees and attorney costs. Try to prevent evictions in the first place by thoroughly and consistently screening your tenants before they’re allowed to move in.

In addition to the legal services mentioned above, other professional assistance can be deducted, as well. Consulting a tax professional is not only advisable, but also a deductible expense. Hiring an accountant to file your taxes can keep you from overlooking any deductions available to you. If you do decide to handle your taxes yourself, the same deduction is applicable if you use tax preparation software. 

Local and Long Distance Travel

Many landlords like to routinely check in on their tenants and property. You might also need to handle maintenance, repairs, or improvements. If you use your personal vehicle to make the trip, you can deduct the cost of travel. For long distance, examples of deductible expenses include car mileage, airfare, or hotel costs. There are a couple of methods and best to consult your CPA.

Wages For Employees and Contractors

You can deduct the wages of a property manager or maintenance worker as a rental business expense. This also holds true for independent contractors like carpenters or electricians. A benefit of hiring independent contractors is that you don’t have to withhold federal taxes out of their paycheck or pay some worker’s Social Security and Medicare taxes. However, you do need to file IRS Form 1099-MISC if you pay them over $600 during the year.

Finally, employee meal and entertainment expenses are deductible like holiday parties for your staff. If you incur an expense while doing business with a potential client you can also deduct a percentage of the total.