Nobody likes paying taxes, especially taxes that could have been avoided. Becoming familiar with the top landlord tax deductions at your disposal is the first step towards making sure you only pay the taxes you owe.
As a landlord, you are running a passive income business for your rental properties. Rental income represents your revenue, but not your profit since you incur lots of expenses along the way.
Since you only pay taxes on your net profit, it’s important to not miss any qualifying expenses, or tax deductions, when calculating your taxable income.
What Qualifies as an Expense?
Many landlords who are just starting out often get confused about what is considered an expense that can be deducted from profit.
For example – if you purchase a duplex and renovate the kitchen, would the purchase cost and cost of renovation be tax deductible?
This is where the difference between current expenses and capital expenditures (also referred to as Capex) comes in.
Current expenses are the same as tax deductions. These are the annual expenses that reduce your annual taxable income for the given tax year.
The most common and intuitive current expenses are things like paying for landscaping or management fees since these are examples of cash costs of running your rental operation.
However, there are some not so intuitive, non-cash, costs that qualify as current expenses such as depreciation expense, which is closely related to capital expenditures.
Capital expenditures encompass the costs of purchasing long-term assets or making improvements to such assets that result in long-term value.
Take our kitchen renovation example: since the newly renovated kitchen will be used over many years, it does not make sense to count the entire investment as an expense at the time it was incurred.
Doing so would also allow you to “cheat” the system by taking a huge loss and avoiding taxes only to then sell the property later and recoup your expenses.
Instead, tax accounting is designed to align the cost of an asset with the actual use of the asset by dividing the capital expenditure (the cost to renovate the kitchen) by the useful life of the asset (how long would a kitchen typically last).
This results in an annual current expense called depreciation, which is tax-deductible and can be used to reduce your rental income for the purposes of calculating net profit and due taxes.
So what are the top landlord tax deductions for 2020? Let’s take a look
Top 10 Landlord Tax Deductions
The following list of landlord tax deductions is not meant to be all-encompassing, but rather point out the top deductions that will account for the vast majority of a rental business’ expenses.
#1 – Depreciation
Starting off with our example from above, one of the largest expenses that all landlords will have is the depreciation expense of their assets.
There are several types of expenses that have to be capitalized and depreciated, including the value of the property’s structure, improvements such as new appliances, new carpets and renovations, and equipment purchases.
#2 – Interest Expense and Mortgage Points
This is one of the largest landlord tax deductions for rental properties with debt.
If you have a mortgage on the property, your interest payments (not principal) are considered tax-deductible. If you paid down the mortgage rate using points, this expense is tax-deductible as well.
Also, landlords are able to deduct the interest expense of credit cards for purchases used for the rental property.
#3 – Management Fees
The cost of fees paid to a management company or property manager that assists you with the rental operation counts as a tax-deductible expense.
#4 – Repairs
For repairs that are considered the landlord’s responsibility, one-off repair expenses count as tax deductions that can reduce your annual tax bill.
Repair expenses include:
- A/C repair
- Patching holes in wall and painting
- Appliance repair
- Plumbing repairs
- Roof leaks
#5 – Maintenance
Different from repair expenses which are usually unexpected, maintenance expenses are regular, ongoing expenses associated with maintaining the property in its current condition.
Maintenance expenses include:
- Pool cleaning
- Pest control
- HOA fees
- Replacing light bulbs
- Appliance upkeep
- Replacing smoke detector batteries
- A/C filters
#6 – Utilities
If you pay for electric, gas, heating oil, trash / recycling, or water / sewer, you can deduct these expenses for tax purposes.
You should deduct the cost of utilities whether or not you pass the cost on to your renters, but if you do, remember to count the reimbursement as income as well.
#7 – Insurance
We strongly recommend all landlords to have general liability insurance at least. If you have a mortgage, you likely pay for additional insurance such as hazard and flood.
The cost of insurance premiums associated with your rentals can be deducted for tax purposes.
Examples of deductible insurance premiums:
- Liability insurance
- Homeowners insurance
- Flood insurance
- Fire, damage, hazard insurance
- Worker’s compensation insurance
- Theft insurance
Note: while paid for by renters and therefore not tax-deductible, see how renters insurance can benefit landlords.
#8 – Travel Expenses
Many landlords live far from their rental properties, but not many landlords know that travel expenses incurred to visit their rentals are counted as landlord tax deductions.
These are limited to long-distance travel and include the cost of:
- Rental cars / Ubers
- Meals (50% of the cost)
#9 – Taxes
All tax expenses associated with your rental operation can be used to lower your rental net profit.
The largest of these is usually the property tax, but other types of tax expenses include:
- Any city, county, or state taxes
- Social Security, Medicare, and unemployment taxes if you have employees
- Personal property tax
- Vehicle tax
- Permit and inspection costs
Assuming you hold a mortgage on your rental property, the property tax is paid for by your lender and will be included in their tax documents already.
#10 – Legal and Professional Fees
Even though these days it’s easier than ever to do your own taxes and create your own leases, sometimes it’s best to consult a professional.
The cost of hiring pros such as lawyers, accountants, tax preparers, engineers, and architects are part of the cost of running your rental business and can be expensed as a landlord tax deduction.