As a landlord, you can incur a lot of expenses. While expenses are a necessary part of the business, the good news is that many of them can be deducted from your taxes at the end of the year.
In this article, we’ll be going over what rental property expenses are tax deductible for landlords.
Operating expenses are the consistent, everyday expenses that all landlords have. These include maintenance, supplies, utilities, advertising, and salaries, among other things.
If an expense qualifies as an operating expense, then it’s deductible in the same year it’s incurred. The IRS has listed the following four criteria that an expense must meet in order to qualify as an operating expense:
- Ordinary and necessary
- Reasonable in amount
- Directly related to your business activity
One of the most common operating costs for landlords is car and local transportation expenses. You can deduct the expenses you incur from local day trips to and from your rental properties, your prominent place of business, locations for business meetings, and other places specifically for your rental activities.
There are two ways to deduct car and local transportation expenses: the actual expense method and the standard mileage rate. With the actual expense method, you must keep track of the precise costs for operating your car, including gas, oil, maintenance, tires, and insurance. If you use the standard mileage rate, on the other hand, you can deduct a set amount for every mile you drive for business purposes. So, what is the standard mileage rate for 2022? Right now, the IRS has it set at 62.5 cents per mile.
If you’re a new landlord, you aren’t able to deduct repairs and operating expenses before your property is ready to rent as standard deductions. They can, however, be deducted as start-up expenses.
With the start-up expense deduction, you can deduct up to $5,000 of expenses in your first year in business, even if your unit isn’t placed in service yet. Qualifying expenses include office supplies and equipment, investigative costs, minor repairs, insurance premiums, website-building costs, and the cost of finding and training employees.
Casualty Loss Expenses
If your property undergoes sudden and unexpected damage or loss, this is called a casualty loss. Casualty losses can result from natural disasters, accidents, theft, and vandalism. If the expenses you incur from a casualty loss meet the necessary criteria, you can deduct them from your taxes.
The IRS keeps a close eye on casualty loss expense deductions. To qualify as a casualty loss, the damage or loss must happen suddenly and unexpectedly. Gradual deterioration and normal wear and tear aren’t deductible as casualty loss expenses. If you want to replace your roofing because it’s getting worn down by the weather, you can’t deduct these expenses under the casualty loss category. However, if your roof caves in during a violent storm, the cost to get it repaired would qualify.
When all the expenses you incur are greater than the revenue you bring in from your rental properties through rent and other avenues, you experience a rental loss. Many new landlords experience a rental loss at the end of the year. If this is you, you can take advantage of rental loss deductions.
When you deduct rental losses, you must follow the passive loss rule. This rule dictates that you cannot deduct passive losses from your active or portfolio income. Rental loss, which is a form of passive loss, can therefore only be deducted from your income in the passive category, which comes from businesses you don’t actively manage (active income is your day job salary, and portfolio income is investment income).
There are couple of exemptions in place to relax the passive loss rule for. These include the $25,000 offset, which allows qualifying landlords to deduct up to $25,000 of passive losses from their active and portfolio income, and the real estate profession exemption, which allows real estate professionals to treat rent as active income.
As you can see, there are quite a few expenses for landlords that are tax deductible. It’s your job to familiarize yourself with the tax deductions that you qualify for and how these deductions can be applied.