Ask any real estate investor why they’re attracted to this asset class, and 9 times out of 10 they’ll mention the tax advantages. And it’s true: the federal tax code is incredibly generous to property owners.
Yet landlords often overlook many of the tax deductions available to them. Most are so laser-focused on the mortgage interest deduction and depreciation that they miss other write offs in the process. This year, make it a priority to maximize your investment’s full potential by taking as many write offs as possible.
Here are 8 tax write-offs that landlords should be aware of this tax season:
“That’s so obvious!,” you might be thinking. But wait—here me out.
We aren’t just talking about mortgage interest. Yes, whenever you own commercial real estate, multifamily or otherwise, you can deduct mortgage interest. That’s one of the single largest benefits to owning commercial property.
However, did you realize that you can also write off the interest paid on company credit cards, lines of credit, and other loans used to acquire, improve or for other activities related to your rental property? For example, if you put $5,000 on your credit card to purchase new appliances for one of your rental units, the interest you pay on that credit card can be deducted on your taxes. Just be sure to keep a separate business credit card; it’s the easiest way to track expenses and prevent the commingling of funds.
Once again, most real estate investors understand that depreciation is one of the biggest advantages to owning rental property. Typically, real estate investors depreciate their assets over either 27.5 years (residential) or 39 years (commercial), depending on the type of property. Those terms are what the IRS considers the “useful life” of the property.
Yet most landlords don’t realize that they can actually depreciate their assets faster by doing a cost segregation study. A cost segregation study, typically performed by a CPA, assigns values to the various components of a property. Personal property, for instance, such as furniture, carpets, fixtures, window treatments and appliances, can usually be depreciated over a 5- to 7-year period. Land improvements, such as sidewalks, paving, fencing and landscaping, can usually be depreciated over a 15-year period. The rest of the building is depreciated over the standard time horizon (either 27.5 or 39 years).
The primary benefit to doing a cost segregation study is that it allows real estate investors to accelerate depreciation. This puts money back into an investor’s pocket faster, which is particularly beneficial in the first years of ownership if you’ve already put out a large chunk of cash to acquire or renovate a new asset. But cost segregation studies are complicated and can be expensive (+/- $10,000) so landlords must take that into consideration as well. The value of the property will typically dictate whether it makes sense for a landlord to move forward with a cost segregation study or not.
Similarly, landlords might also qualify for “bonus depreciation,” a tool used to incentivize business and property owners to invest in certain capital assets, such as qualified leasehold improvements. These improvements include: furniture and equipment purchases; renovations, expansion and new building construction; and tangible personal property such as new air conditioning units. Bonus depreciation can only be used if property is new and has an expected useful life of less than 20 years.
Bonus depreciation allows landlords to accelerate depreciation for qualifying assets, a benefit set to phase out after this year. Currently, landlords can depreciate up to 50% of a new item’s cost in the first year it was placed in service. The bonus depreciation for items purchased after January 1, 2018 will fall to 40%, and then 30% in 2019 before being fully phased out.
Unlike most building improvements, which are depreciated over either a 27.5 or 39 year time horizon, accessibility upgrades are treated differently. The IRS allows landlords to write off up to $15,000 per year related to expenses incurred while making a property more handicapped accessible.
If you’ve installed a wheelchair ramp, widened doorways, installed lower countertops or made other improvements to accommodate a resident with disabilities, you’ll want to write off those costs this year. Any amount in excess of $15,000 is then added to the tax basis of the property and depreciated from there.
Landlords usually realize that they can write off travel expenses, such as the mileage they rack up to travel between rental properties – but most don’t take advantage of the benefit.
First, it’s a pain in the neck to log miles traveled. It requires very thorough bookkeeping. Second, most landlords assume the benefit isn’t worth the headache. For landlords who live in urban areas and don’t travel far between properties, that might be true. Yet for those who own rental property in more rural or suburban locations: just think of how many trips you’ve taken to Home Depot. If you’re making a 30-mile roundtrip trek once a month, that adds up!
Mileage is only form of travel cost that landlords can write-off on their taxes. The majority of real estate investors don’t know that they can also write off travel expenses related to searching for rental property.
For example, if you’re a real estate investor living in Miami, you might be considering investment opportunities in Atlanta or Nashville where the markets are strong but not quite as overheated as Southern Florida. Any trip you take to evaluate properties in these markets – mileage, airfare, hotels, meals, etc. – can be written off as a business expense, even if you don’t ultimately purchase a property. The major caveat: at least 50% of your time on that trip must be related to evaluating the investment opportunity.
Did you invest in a new website last year? Did you send out mailers in search of investment opportunities? Did you create new signs to post at your property highlighting units available? These costs are all tax-deductible.
Landlords can write off expenses related to BOTH the advertising of their own business and/or the marketing of a specific unit or property. For instance, a landlord who paid a fee to speak on a local real estate development panel could write off that fee. A landlord who hosted an open house at one of their rental units could also write off those costs.
Related: if you’ve offered an incentive to current residents who help market and find you a new replacement tenant upon their departure, this qualifies as an expense that can be deducted.
Legal And Professional Fees
Real estate investors can, and should, track all of the fees and wages paid to their service providers. These are all tax deductible. That includes the fees paid to your attorney, property manager, accountant, contractors or engineers, real estate brokers and more.
There are several types of insurance premiums that landlords might be able to write-off on their taxes this year. The most obvious is landlord insurance, which covers a property owner from financial losses incurred as a result of owning rental property. Landlords may also be able to deduct the premiums paid for other casualty, theft, flood, fire, liability or auto insurance (assuming the vehicle is used for business purposes). Health insurance premiums may also be deductible, if you pay towards your employees’ health insurance.
The key to capturing all of these tax write-offs, of course, is keeping detailed records throughout the year. One of the biggest reasons landlords panic around tax season is because they don’t have a strong grasp on their expenses. They pledged to keep invoices and receipts more organized this year, but inevitable, failed to do so – it happens to the best of us! If this sounds like you, it might be time to consider hiring a property manager (particularly if you self-manage multiple properties).
I would also suggest hiring a CPA or tax advisor. These professionals are trained to know the ins- and outs- of the tax code and will be able to help you take full advantage of these (and other) tax write-offs. After all, if you’re going to invest in real estate, you might as well realize all of its benefits! And the tax benefits are right at the top of that list.