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.
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.