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There are a number of tax deductions that landlords can take advantage of to save money.
If you want to maximize your profit margin, it’s crucial to know how tax deductions work and which ones you qualify for.
With that being said, here are some of the key tax deductions all landlords should know about:
Start-Up Expense Deduction
Start-up expenses are expenses you incur before your units are placed in service and ready to rent. These costs don’t qualify as standard deductions, but they do qualify for the start-up expense deduction. To claim the start-up expense deduction, you must be classified as a business.
Examples of start-up expenses might include:
- Minor repairs
- Office supplies
- Website-building costs
- Cost of finding and training employees
- Insurance premiums
Some examples of things that don’t qualify as start-up expenses are:
- Real property
- Interest and taxes
The start-up expense deduction allows you to deduct $5,000 in your first year of business. After this initial deduction, you deduct leftovers in equal installments over the next 15 years.
Home Office Deduction
If you’re a landlord who manages your properties from home and has a home office, you may qualify for the home office deduction.
Here are the qualification criteria:
- You must be classified as a business
- You must use your home office specifically for rental activities
- You must use your home office regularly
- You must meet one of the following conditions:
- You conduct your most important rental activities at your home office
- You consistently and exclusively use your home office for rental activities
- You hold business meetings or meet with key stakeholders (like tenants) at your home office
- You use a separate building on your property specifically for rental activities
If you qualify for the home office deduction, you can use it to deduct a portion of your home expenses as business expenses.
Car and Local Transportation Expenses
You can deduct transportation costs made for local trips related to your rental activities. Examples include trips to your rental property, your prominent place of business, a garbage dump where you take trash from a rental property, a store where you purchase supplies for rental purposes, and a location where you meet a tenant, vendor, supplier, lawyer, etc. It’s important to know that the IRS is stingy about transportation expenses, so make sure to keep thorough records.
You have two options when it comes to deducting these costs: You can deduct precise expenses, or you can use the standard mileage rate. The standard mileage rate allows you to deduct a set amount for every mile you travel for rental business purposes. So, what is the standard mileage rate for 2022? Currently, it’s 62.5 cents per mile. Although the standard mileage rate usually ends up being lower than precise expenses, it’s a lot easier to utilize.
Casualty Loss Deductions
When you incur sudden and unexpected damage or loss to a property, this is called a casualty. Casualty losses can be the result of accidents, natural disasters, theft, or vandalism. If they meet certain criteria, casualty loss expenses can be deducted.
To qualify as a casualty loss, the damage has to be sudden and caused by an outside force. Normal wear and tear or gradual deterioration doesn’t qualify. If a tree falls on your house during a storm, on the other hand, the repairs would qualify as a casualty loss expense and can be deducted.
Rental Loss Deductions
A rental loss occurs when all expenses exceed the amount of rent and other revenue you bring in from your rental properties. Most new landlords experience rental loss. If this is you, you could qualify for rental loss deductions.
To deduct these losses, you must follow the passive loss rule, which allows you to only deduct rental loss from your passive income. Rent is a form of passive income, and you can’t use rent loss to counterbalance your active income (day job salary) or portfolio income (investments), or vice versa.
There are some exemptions to this rule put in place to help small landlords. These are the $25,000 offset and the real estate profession exemption. If you qualify for rental loss deductions, be sure to review these exemptions to learn how you can maximize your savings on these deductions.
Tax deductions can save you quite a bit of money. If you’re a landlord, chances are you qualify for one or more of these deductions. The more you know about the deductions at your disposal, the more prepared you’ll be come tax season.