Most people epitomize the American entrepreneur as someone who starts with a basic product or solution and through hard work, perseverance, and determination claw their way to fortune and success.
Consider Bill Gates or Michael Dell, quintessential figureheads considered to be great American entrepreneurs of their time. But many people overlook real estate as a viable avenue to wealth, happiness, and success.
On the contrary, landlords often typify the ‘American dream’ motif. Similar to other business owners, many landlords start from the bottom and work their way up, beginning with one property, then two, four, and so forth.
What’s more, the number of renters continues to increase. Just recently, the number of renters in the United States reached 108.5 million in 2018. It’s no wonder people flock towards investing in rental properties.
But how does someone build a real estate empire? How do the millionaires and billionaires of the world manage to stay ahead of the curve? One way savvy landlords stay in front of the pack is by taking advantage of lucrative (and often unique) tax deductions, leaving more money in their pocket.
By partnering with a property management company like Ziprent your costs are fully tax deductible. But let’s take a further look at some of the most optimal investment property tax deductions for landlords in 2020 that can save you more money.
Non-Cash Expense Deductions
In the United States, businesses follow generally accepted accounting principles (GAAP) requirements that businesses expense certain line items that may not have a real cash payment.
Unlike operating expenses, such as utilities, that involve making a payment and getting a good or service in return (in this case power, gas, or even internet), non-cash expenses are accounting expenses that can affect a business earnings.
Landlords can often deduct many of these non-cash expenses translating into substantial tax savings.
Obviously, most landlords would understand that their real estate is considered a long-term asset. According to GAAP, that asset has a designated useful life. As a landlord, you can depreciate the purchase price of the asset (in this case your real estate) over an appropriate period. Residential properties can be depreciated over 27.5 years and commercial properties can be depreciated over 39 years.
Major improvements made to the property can also be depreciated and deducted. Improvements, such as putting on a new addition or completed major renovation projects, may be considered appropriate improvements to depreciate. Landlords cannot depreciate simple maintenance expenditures or minor repairs.
Casualty Loss and Theft
Similar to depreciation, landlords can deduct casualty losses or those due to theft as qualified business expenses. In order to claim a casualty loss, the loss must have occurred as a result of a federally declared disaster. Certain guidelines also pertain and define what can be considered theft. Form 4684 can be used to itemize and report qualified expenses.
Upkeep Related Deductions
As a landlord, you understand that maintaining your investment is crucial, especially if you want to see long-term appreciation. But repairs and upkeep can come at a cost. Recognizing that, the tax code allows landlords to deduct several of these key expenses.
Maintenance and Repairs
The IRS notes state that landlords “can deduct the costs of certain materials, supplies, repairs, and maintenance that you make to your rental property to keep your property in good operating condition.” This incentivizes landlords to keep the property in good working order for the benefit of the tenants leasing the space.
Understand that repairs need to be typical and within reason to be considered deductible. Don’t try including major improvements as a deduction under maintenance and repairs. Patching leaks or replacing broken fixtures would be considered ordinary repairs.
The IRS clarifies that “you can deduct the ordinary and necessary expenses for managing, conserving and maintaining your rental property. Ordinary expenses are those that are common and generally accepted in the business.”
Financing Related Deductions
If you finance your rental properties you may be able to write off several finance related expenses. One of the largest financing related expenses is mortgage interest, however other expenses, such as mortgage insurance premiums and closing costs paid, can be equally beneficial.
Any interest accrued on loans used to acquire or improve a rental property are a common expense and can typically be deducted. While the 2018 Tax Cuts and Jobs Act (TCJA) limits the amount of interest some landlords can deduct, interest is still an important expense that impacts your bottom line.
Closing Costs and Mortgage Insurance Premiums
If you financed the purchase of your investment property, chances are you had to pay closing costs to obtain your loan. The closing costs associated with the purchase of the property are often tax deductible.
Other financing costs that sometimes get overlooked are mortgage insurance premiums. Mortgage insurance is sometimes built into a deal to protect a lender in the event you default on your loan, which is paid by you, the borrower. Over time, these premiums can add up. Luckily, you can deduct these premiums as a qualified expense from your taxable rental income.
Business Operations Expenses and Deductions
Overhead costs are common amongst business owners as they are direct costs that keep the business operating and functioning. Operating expenses such as software, utilities (i.e. phone service, internet, computer hardware), and office space offer some chances for additional deductibility.
Business and Accounting Software
Software that is used to manage the property for the purposes of collecting rents, sending notices, completing background checks and tenant screenings, etc. are permitted expenses that can be deducted. Tax preparation software also falls under this umbrella and is eligible. Fees specifically incurred for background checks and credit reports in of themselves are also deductible.
Utilities (Phone, Internet, Computer Hardware, etc.)
Internet and phone service were not always considered utilities, but over time have become accepted as necessary expenses needed to run a business efficiently as technology continues to evolve.
Computer hardware used for business related activities can be rationalized as business equipment and deducted accordingly. Similarly, if you can document internet and phone usage for business purposes, those bills may be fully or partially deductible.
Home Office Space
Rules on how home offices are treated have changed over recent years. It used to be if you were a remote employee working for a company, you could still claim a portion of your home as a home office. Now, that has been eliminated.
However, as a self-employed landlord, managing your business from your home entitles you a deduction. Since this line item has been highly scrutinized even recently, make sure you can document the designated area in your home used for office space, as well as support the square footage footprint you are using.
Pass-Through Income Tax Deductions
One of the best ways to maximize your tax savings is by ensuring you optimize the legal way in which your real estate holdings are held. Under the current law, qualified individuals (which includes landlords) can receive a massive 20% deduction from their income generated from business entities, including sole-proprietorships, LLCs, partnerships, and S-corporations.
While some limitations exist, the qualified business income deduction or QBI, has been in effect to foster new small business ventures. If structured correctly, your rental income will already be lowered by deducting your business operating expenses and depreciation. You can then apply the 20% pass-through deduction to save even more.
Interested in using Ziprent? Get started for free by adding your property. We’ll help you take care of everything ‘cause that’s our job. Just sit back, relax, and don’t forget to write off the cost of property management services this next tax season.
1 Bischoff, B. (2013, April 23). The tax advantages of being a landlord. Retrieved May 26, 2020, from https://www.marketwatch.com/story/the-tax-advantages-of-being-a-landlord-2013-04-23
2 Davis, G. B., Davis, B., Davis, G. B., Davis, G. B., Davis, G. B., Davis, G. B., … Davis, G. B. (2020, April 2). Rental Property Deduction Checklist: 20 Tax Deductions for Landlords in 2020. Retrieved May 26, 2020, from https://sparkrental.com/20-tax-deductions-rental-properties-guide/
3 Form 4684 Theft and Casualty Loss Deduction: H&R Block. (2019, December 20). Retrieved May 26, 2020, from https://www.hrblock.com/tax-center/irs/forms/form-4684/
4 Tips on Rental Real Estate Income, Deductions and Recordkeeping. (n.d.). Retrieved May 26, 2020, from https://www.irs.gov/businesses/small-businesses-self-employed/tips-on-rental-real-estate-income-deductions-and-recordkeeping
5 Fishman, S., & J.d. (2017, January 12). Top Ten Tax Deductions for Landlords. Retrieved May 26, 2020, from https://www.nolo.com/legal-encyclopedia/top-ten-tax-deductions-landlords-29497.html
6 Frankel, M. (2020, May 21). What Is the Pass-Through Tax Deduction? Retrieved May 26, 2020, from https://www.fool.com/millionacres/taxes/articles/what-pass-through-tax-deduction/
7 Decade in review: Number of U.S. renters surpasses 100 million. (2020, March 12). Retrieved May 26, 2020, from https://www.housingwire.com/articles/decade-in-review-number-of-u-s-renters-surpasses-100-million/