Owning a rental property is owning a business. You must maintain an account of every transaction concerning the property, its use, also take note of any problems that may come across concerning it. The IRS has many rules concerning the taxation of rental asset and many ways to save money when tax-time comes around.
Most landlords begin by renting a second home, their primary residence should have a room or an area within it that is designated a “home office”. The home office must fit two criteria:
- It must be the principal place of business
- It must be regularly and exclusively used
A landlord can meet both criteria easily if they hold meetings with the renter at their home office and if they conduct all business dealing with the rental property through their home office. The second point is a bit more cumbersome. Many view their office as the computer desk in the living room, this designation is disqualified under the term exclusive because it is likely a common family area. A home office should be a closet, a spare bedroom, or a space in the basement that serves no other use than the running of the rental business.
Another popular option is to buy a property for the sole purpose of renting it. In this case, any interest on the mortgage paid is tax deductible, any interest on any loan used to repair or maintain the rental property is tax deductible, and any costs paid to obtain the mortgage can usually be deducted as an expense. However the property came to your possession, you can also deduct what is called “depreciation” which is the reduction of the value of the rental property over time.
Landlords also qualify for travel deductions, the IRS states that these expenses may not be lavish or extravagant, meaning that if you own a rental property you must stay overnight to visit, you cannot deduct a five-star hotel with a surplus of room service. An example of a qualified travel deduction might be to go to the hardware store and while you’re there, purchase grout to fix tile in your rental’s bathroom. This cost can be deducted under business expenses, additionally, the interest on your credit card that you use to purchase the grout can also be deducted, as can be the gas getting to the hardware store and to the rental property. DJW Management works with a number of accountants who can more accurately maximize your tax return.
On repairs, DJW Management understands that it is crucially important to show that you’re repairing and not improving. The IRS may attempt to claim these non-deductible improvements (capital investment into the rental property), the landlord should do the minimum amount of effort to keep the broken item operational, such as steam cleaning deeply soiled carpets or replacing a section of carpet as opposed to the whole unit’s carpet or having your facility maintenance person repair a broken appliance as opposed to replacing it with a new unit. Unfortunately, the IRS may still attempt to claim you’re improving and not repairing, one way to combat this is to extensively document the work. Always use words relating to “fix” or “mend”, never “replace”. You will need to show records if they attempt to nullify your deduction.
In 2018, President Trump signed into law the Tax Cuts and Jobs Act. This legislation produced a windfall of tax advantage for many and especially for landlords. One of the best examples is the new pass-through tax deduction. How this works is for a pass-through business (LLC, sole proprietorship, S-Corporation, and partnerships) the tax incurred at the business level falls through to the individual owners. Why this matters is that it resolves a double taxation issue, with a standard corporation, money is taxed at the business and individual level. The Tax Cuts and Jobs act also provides a new depreciation schedule. At present, the Act provides for 100% depreciation of your rental properties. It is important to depreciate your property on a timely schedule as this will lower your taxes through the reduction of reportable income.
Through a structured taxation policy, you can save yourself bundles of money each year while growing your rental portfolio. Tax advantages abound for the informed and diligent property manager and we at DJW Management will keep you informed of any tax advantages to come.