10 Advantageous Tax Breaks For Landlords

When you manage a real estate portfolio of any scale, keeping accurate records is a must – especially when it comes to tax time. It’s no secret that top-notch organizing is directly connected to your bottom line.

By having the correct records and know-how, you can claim the most tax breaks accurately and legally, keeping you in good standing with the IRS without missing any opportunities to save money. Every dollar counts, so let’s find out what are the 10 best tax breaks landlords can grab.

1. Mortgage Interest

Investors that use loans to purchase real estate make regular mortgage payments that generate substantial interest – especially at the beginning of the loan term. Deducting this large sum can be a great help in reducing your taxes owed, especially if you plan to itemize taxes.  claim on your rental real estate property. Interest from a HELOC also belongs to this category.

2.  Straight-Line Depreciation

All buildings lose useful life as they get older. In the tax world, residential buildings depreciate over the span of 27.5 years and commercial buildings 39 years. This figure, created by the IRS, allows landlords to deduct 1/27.5 of a residential property’s value per year and 1/39 of a commercial property’s value. This simplified method is a safe route for landlords to take when they are unsure about different rates of depreciation within their properties.

3. Segmented Depreciation

Instead of using the standard depreciation rate for buildings, landlords can also claim components of their properties that depreciate at different rates. Essentially, you don’t count your property as one asset but split it into multiple assets that depreciate at different rates.

Segmented depreciation allows landlords to claim more accelerated rates of depreciation on certain parts of rentals, like fences, flooring, and appliances. In fact, investors that take advantage of this type of depreciation can claim more on expenses that wear out more quickly than the building as a whole.

To make it simpler to calculate depreciation rates, the IRS created the Modified Accelerated Cost Recovery System (MACRS) to calculate depreciation rates within investment properties.

With MACRS, you can claim appliances, carpeting, and furniture as fully depreciated after 5 years, equating to ⅕ of its cost claimed per year. Compared to 1/27th, that’s significantly more write-offs that allow you to stay on top of vital tasks like carpet replacement and much more. When you replace these assets, you may begin the 5-year depreciation process again.

4. Loan Fees

If you buy an investment property with a loan, then you can deduct many loan-related fees that include closing costs, origination fees, and points paid down. Since it’s difficult to identify what fees are deductible on your own, consult a tax professional to make sure that you’re claiming the right numbers, especially if you bought more than one property in a year. This will ensure that your tax return abides by IRS regulations and that you will have the least chance of delays after filing.

5. Repairs And Maintenance

Rental investments need regular upkeep throughout the year. On top of that, they can experience unexpected repair emergencies. Whether you need to pay for lawn mowing, fixing a broken faucet, or pay for any other upkeep like hvac servicing, these costs can be written off during tax time. So, if your unit needs a new coat of paint, it is possible to recoup expenses like these to give your budget more wiggle room.

6. Casualty Losses

If your investment property experiences loss from theft or physical damage, then you can potentially claim them as business expenses. There are strict guidelines and limitations regarding what you can claim as loss, so speak to your tax pro to get the specifics. When you can claim these losses, it can recoup the costs of fixing your rental property and keep costs manageable for your portfolio.

7. Eviction Legal Fees

Evictions cost a lot of money. Court proceedings can make a large impact on your rental business. On top of losing rent, taking legal action against a tenant adds up to a lot of court fees and attorney costs. Thankfully, you can deduct some of these eviction-related legal expenses.

If your rental business depends on outsourcing property management, new resident placement fees, legal fees, accounting fees, and other business expenses related to paying other pros to help (who aren’t your employees) can be deducted as professional services fees.

8. Driving And Transportation

One thing  new landlords don’t expect is the large amount of driving that is involved with the lifestyle. Whether you need to see your tax pro, go to the bank, pick up supplies for repairs, meet with business partners, or simply drive to your properties for an inspection, the miles add up quickly. According to the IRS, you can claim a standard mileage rate of $0.655 per mile. Check to make sure you are logging your miles according to IRS standards to ensure your numbers are accurate.

9. Utilities

If you pay any utilities for your rental units, such as gas, electric, or trash pickup, then you can claim these costs on your tax return. Ensure that your rental income doesn’t include utility reimbursement first.  Claiming utility expenses can reduce your tax bill and create a better outcome for your year-end tax filing.

10. Property Taxes

As a landlord, you pay property taxes on every property in your portfolio. These expenses add up quickly, which makes it good news that you can claim them on your taxes. To get accurate numbers, check with your tax professional to claim the right amount of property taxes for your portfolio.

The Bottom Line

There is so much more that can be added to this list to further specify the type of savings you can claim on your taxes as a landlord. For complete and up-to-date information, seek a certified CPA today.

Banks Pulling Back on Commercial Lending Nationwide

Office vacancies — plus the still simmering banking crisis — have us considering what a potential bust in the $6 trillion U.S. office property market might mean.

Why it matters: A deep downturn in property values is more than a problem for oligarchs, feuding billionaire clans and oil-rich foreign wealth funds.

It could touch normies, too, by hurting pension fund performance and city tax revenues.

If it gets bad enough, it may undermine banks, crimp lending and slow the economy.

State of play: Office utilization is still low compared to the before-times, with WFH and hybrid set-ups now standard for millions of former office drones.

By the numbers: Nearly 30% of companies still have remote or hybrid options — though that’s come down from 40% in 2021, the latest government data shows.

Utilization — how many people actually use the offices that their companies rent — is down roughly 50% from pre-COVID levels, according to swipe-card systems operator Kastle Systems.

Office building appraisal values were down 25% in February compared to a year prior, according to a Goldman Sachs note that cites research shop Green Street.

Office rents — especially in large cities with lengthy commutes — have fallen, too.

The latest: Signs of stress are picking up, with delinquencies on commercial office mortgages touching 2.4% in February, up from 1.5% six months ago, according to Trepp. Defaults are starting to appear as well.

Multinational real estate giant Brookfield last month defaulted on over $750 million in debt tied to two office buildings in downtown Los Angeles.

Pimco’s Columbia Property Trust office REIT defaulted on $1.7 billion in debt tied to a seven-building portfolio.

The head of RXR, another large New York office landlord, told the Financial Times last month it was preparing to stop debt payments on some properties, as it looks to renegotiate.

The impact: The value of commercial property produces anywhere between 20% and 40% of tax revenues for states and localities.

If those revenues fall, governments will have to cut services, raise taxes, or both, making cities less attractive.

Meanwhile, smaller banks are big lenders to real estate developers, putting them at risk if office defaults spike.

Goldman Sachs analysts estimate that banks hold roughly half of the $5.6 trillion in commercial property mortgages outstanding, with the overwhelming majority of that half held at small banks.

Many of those same regional banks have been under pressure since Silicon Valley Bank failed. With deposits migrating to larger institutions — or simply to higher-interest accounts like money markets — they’ll have less capacity to refinance loans on office properties.

Property loans typically need to be refinanced every five to seven years — and failure to refinance or pay off the loan can result in a default. When that happens, the debt gets renegotiated, and the lender often takes losses.

If defaults pile up, it could worsen the pressure on office building values and make banks leerier of making office loans — exacerbating the defaults and the banks’ losses.

Finally, pension funds have also sunk billions into real estate in recent years. The top 200 institutional managers owned about a half-trillion worth of real estate in 2022, according to trade publication Pensions & Investments.

“How those real estate portfolios of buildings are doing, will then affect, in the end, returns which these pension funds are getting. And that will also affect households which are dependent on these pension funds,” says Vrinda Mittal, a Ph.D. candidate in finance and economics at Columbia Business School who has studied private real estate investments.

The bottom line: We’re still in the early stages of the post-COVID era for offices, and how it will shake out is the trillion-dollar question.

While you were ducking out of the office early Friday afternoon for happy hour, the Federal Reserve released its weekly report on the U.S. banking system.

Why it matters: The figures showed that amid the turmoil that’s engulfed the banking sector, there was an outflow of deposits from smaller banks in mid-March — though not on a scale that appears overly worrisome.

Big US Banks Pull Back on Office and Apartment Lending

Big US Banks Pull Back on Office and Apartment Lending

Slowdown Seen in CoStar Data Could Extend Into 2023, With Possible Bright Spots for Retail, Data Centers

The nation’s largest banks that are most active in commercial real estate lending eased off their strong support for property purchases in the past several months, with CoStar data showing a particularly steep drop in financing for offices and apartments.

The trend is likely to extend into this year, based on comments from bank executives singling out office properties for weakness in their earnings reports this month.

While office building sales in 2022 made up 13% of total transactions, CoStar data shows, those sales fell 35% in the second half from the first half. The largest banks meanwhile financed 47% fewer office deals in the final six months of the year.

“The office market is showing signs of weakness due to weak demand, driving higher vacancy rates and deteriorating operating performance, as well as challenging economic and capital market conditions,” Mike Santomassimo, chief financial officer of Wells Fargo, said on the bank’s earnings call last week. “While we haven’t seen this translate to significant loss content yet, we do expect to see stress over time and are proactively working with borrowers to manage our exposure and being disciplined in our underwriting standards with both, outstanding balances and credits down compared to a year ago.”

The weakness is widespread even in the Class A properties on which Wells Fargo has originated loans.

“We are very watchful on cities like San Francisco, like Los Angeles, like Washington, D.C., where you’re seeing lease rates overall be much lower than other cities across the country,” Santomassimo added. “Those are markets that we’re keeping a pretty close eye on and making sure we’re being proactive with our borrowers to make sure we’re thinking way ahead of any maturities or extensions, options that need to get put in place to help manage through it.”

Largest Financed Deals

The data resulted from a review of 2022’s largest financed property sales by the biggest U.S. banks as tracked by CoStar, and additional lending activity could have occurred last year that wasn’t picked up in the data. Based on last year’s totals, retail and data center loans are shaping up to be possible bright spots for the finance industry in 2023.

In the analysis, Wells Fargo was among the most active bank lenders and tallied the largest loan total in both the apartment and industrial sectors. That is a focus that began for Wells Fargo in 2021, Nipul Patel, head of real estate banking within Wells Fargo’s commercial real estate group, told CoStar News in an interview.

The robustness of activity in the two sectors peaked in the first quarter of 2022, according to Patel.

Nipul Patel of Wells Fargo projected weaker lending activity in apartment, industrial and office properties. (Wells Fargo)

CoStar data shows that apartment property sales were 18% lower in the second half of the year than the first half. The largest banks financed 42% fewer apartment deals in the back half.

“The second half of the year for the most part was pretty dormant in regard to new origination activity both in the multifamily and industrial sector,” Patel said.

That pause is likely to continue early this year given elevated interest rates and price discovery going on with those property types, he said.

Apartments on Watch

Some of the nation’s other large banks reported increases in some types of apartments during their earnings calls.

JPMorgan Chase’s commercial real estate loans were up 2% quarter-over-quarter, reflecting a slower pace of growth from earlier in the year because of the higher rates, which affects both originations and prepayment activity, the bank said.

“The vast majority of loan balances in commercial real estate are for affordable multifamily housing, which is really quite secure from a credit perspective for a variety of reasons,” Jeremy Barnum, JPMorgan’s chief financial officer, said on the call. “So, we feel quite comfortable with the loss profile of that business.”

First Republic Bank, based in San Francisco, backed more apartment deals in 2022 than other property types. The bank reported achieving record apartment lending volume in 2022.

First Republic said it expects to continue that loan growth in 2023; however, it is maintaining conservative underwriting standards. The average loan-to-value ratio for all real estate loans it originated during the year was 57%, the bank said. Loans with that approximate LTV ratio are generally considered low risk.

Property Types With Promise

Where the financing outlook is brighter by property type is in retail, particularly such properties as grocery-anchored centers, and also in data centers, Patel of Wells Fargo said.

CoStar data shows that financing started picking up in the second half of 2022 by the largest banks in both the retail and specialty sectors. Retail loans by the largest banks were up 63% in the second half of the year, even though transaction activity was down 26% in the sector.

For specialty properties, such as data centers and self-storage properties, lending was up nearly 174%, according to CoStar data. Specialty property sales were up by nearly the same percentage in the second half of the year over the first half.