Property ownership takes a high degree of commitment from a landlord. It is not a passive income earner and requires constant involvement. From unpaid rent to damage to the property, a landlord must be prepared for dozens of eventualities.
However, rental property ownership is not all hard work with no rewards. Additional to rental income, landlords are entitled to some tax deductions that can make property ownership even more lucrative. Here are five write-offs all landlords should know about:
Finding an affordable property management company to help you manage your rental property has many advantages. APM’s agents in California take care of many day-to-day details of rental property ownership, such as ensuring that rent is paid on time, repairs and maintenance are performed, and landlords are saved from the additional stress of interacting with challenging tenants.
Hiring a property management company has some tax advantages for the landlord. Owning a rental property is regarded as a business operation by the Internal Revenue Service (IRS). Business owners can claim deductions for professional services used as part of running this enterprise. This includes payments to attorneys, bookkeepers, financial advisors, and a property management company.
Payments to employees and contractors
Any payments a landlord makes to employees and contractors can be deducted as a business expense. This includes payments made to a property management company. By maintaining a meticulous paper trail, a landlord can write off these expenses.
No matter how small the amount you pay someone, maintaining records is advisable. For example, if you pay a school kid some money for mowing your lawn or shoveling the driveway each week, write up receipts as proof of payment. Each dollar spent can accumulate to form a substantial deductible.
Business owners should keep travel logs to record trips related to their companies. A landlord should be no different. Maintain a logbook of trips related to your rental property, including trips to a hardware store or visiting a property management company’s premises. Keep receipts, and other documentary evidence to prove you undertook these trips should the IRS choose to conduct an audit.
Long-distance trips out-of-state to visit potential rental properties can also be treated as a tax-deductible. You will need to meet specific criteria, such as proving that you devoted more than half the time the trip took to evaluating a property investment opportunity. Ensure that you understand the requirements to write such travel events off.
Property owners can deduct mortgage interest on investment properties they own. This is a substantial deductible that many landlords take advantage of to save on their taxes. However, this is not the only interest form that qualifies for a tax write-off.
Interest incurred on lines of credit, loans, and credit cards that pertain directly to property ownership is also deductible. However, the onus is on a landlord to demonstrate that interest was incurred on transactions related to the acquisition, improvement, and maintenance of the investment property.
The IRS has depreciation formulas for property ownership that landlords should investigate. While property values tend to appreciate, the buildings and contents can depreciate in tax terms. To take advantage of this, separate the value of the land and any buildings on it. For the sake of accuracy, get an appraisal from an insurance agent.
The IRS regards a building’s lifespan as 27.5 years. Therefore, an investment property owner can write off 1/27th of a building each year. You can even accelerate depreciation on some property aspects, such as land improvements, which could include paving, landscaping, sidewalks, and erecting fences and walls. A landlord can do tax deductions on such expenses over 15 years.