What are some tax deduction methods for landlords in the United States?
Understanding how to effectively deduct taxes is crucial for landlords in the United States. This article will delve into how landlords in the U.S. can utilize various means for tax deductions, such as property depreciation, transportation costs, repairs and maintenance, employee wages, professional fees, interest, taxes and insurance, education, and public utility costs, among others. We will elaborate on the specifics and considerations for each tax deduction item, assisting landlords in maximizing tax relief while ensuring compliance.
As a landlord in the United States, the following expense can be used for tax deductions:
Depreciation is one of the most important tax deduction items. Depreciation can reduce taxable income without affecting actual cash flow. Regardless of whether you have actually claimed depreciation, the IRS assumes that you have already claimed depreciation, the IRS assumes that you have already enjoyed the tax benefits of depreciation for the current year. Even if you haven’t used depreciation, the IRS will automatically have a 25% depreciation recapture when you sell the property.
2. Transportation Expenses
The transportation expenses incurred by the landlord while fulfilling their landlord responsibilities (such as airfare, fuel costs, etc.) can be used as tax deductions. For example, the expenses for driving to the investment property for handling related matters.
Additionally, accommodation expenses and 50% of meal expenses incurred when the landlord is traveling for purposes unrelated to their landlord duties can also be used for tax deductible.
3. Repaire and Maintenance
The expenses necessary for the repair and maintenance to keep the property in good working condition can be used for tax deductible. When incurring expenses for repair, maintenance, and renovations, it is advisable to categorize them as standard repair and maintenance whenever possible for tax purposes.
It is important to note that expenses related to projects that increase the value of the property, such as adding an extra bedroom, are not eligible for this tax deduction.
The best practice is to list all your renovation, repair, and maintenance invoices and receipts item by item, organized by supplier. This way, your registered accountant can more easily determine which specific expenses correspond to each tax deductible category.
4. Employee Salaries
Payments made to W-2 employees and contractors to assist in the operation of rental properties can be used as tax deductions. For example, wages paid to maintenance workers can be used as tax deductions.
5. Professional Fee
Professional fees, including legal, accounting, property management, and other related expenses associated with rental properties, are eligible for tax deductions and should be reported directly on Form E of your tax return."
Interest on loans used for rental property businesses, including mortgage interest, interest on home equity lines of credit used for rental business purposes, and any other interest, can be tax deductible.
This is a significant feature for pure rental properties compared to primary residences and secondary residences, where interest can only be deducted within a principal amount of $750,000.
7. Tax and Insurance
In addition to income tax, all tax liabilities arising from owning rental properties can be deducted. This typically includes property tax, school district tax, and land tax.
Unlike primary residences, there is no limit to the property tax deductions for properties held for investment purposes.
Insurance, including homeowners insurance, hazard insurance, liability insurance, and flood insurance, can all be used as deductions.
The education expenses incurred to maintain or enhance the skills required for a landlord's rental property business are tax-deductible.
However, it is important to note that these expenses can only be used as deductions once you have commenced your rental property business. Moreover, the course or training fees for starting a new business are generally not eligible for tax deductions because they are considered to be related to acquiring new skills rather than maintaining or enhancing the skills within your existing rental property business.
9. Public Utilities
Every landlord handles utilities differently. If you choose to cover expenses such as gas, water, electricity, heating, and air conditioning for your tenants, you can deduct these as eligible for tax deductions. If you also pay for internet and cable television expenses, you can include these as utility expenditures.
Other miscellaneous costs related to your leasing business, such as HOA fees and bank charges, can also be included in IRS Form E.