Landlords Tax Tips

Editorial team of TFX

• 05.10.21 • 5 min read

Do you own a piece of property that you rent out? Aside from the possibility for consistent income and capital growth, real estate investments include tax deductions that can help you save money on your taxes. But first, examine who you are as a real estate investor. Are you a real estate professional or are you into passive real estate investing? The number of landlord tax advantages you get depends on whether you are classified as one or the other.

 Passive Investor vs. Professional

Rental losses are not passive if you spend a lot of your working hours in the real estate industry as a real estate professional. This means that all losses, whether passive or nonpassive, are tax-deductible real estate expenses.

If it's a sideline investment, your losses will be passive and may be deducted up to $25,000 from your rental income. If your modified adjusted gross income (MAGI) is between $100,000 and $150,000, the deduction is phased down. Losses of more than $25,000 are allowed to be rolled forward to the next year. 

A real estate professional is somebody who devotes over half of his or her working time to the rental sector, according to the Internal Revenue Service (IRS). Real estate development, construction, purchase, and management are all examples of this. To be considered a professional, you must work on your real estate rental properties for more than 750 hours each year.

Repairs vs. Improvements

Owners of rental properties may believe that whatever they do on their property is tax-deductible. According to the IRS, this is not the case. A repair preserves your rental property in good working order and is a tax-deductible expense when paid for throughout the year. Painting, repairing a broken toilet, and replacing a malfunctioning light switch are among the repairs.

Improvements, on the other hand, increase the value of your home and are not tax-deductible when paid for. The value of improvements must be recovered by depreciating the outlay over the life of the property. A new roof, patio, or garage are examples of improvements.

From a tax standpoint, you should undertake repairs as soon as problems develop rather than waiting until they become severe enough to necessitate renovations.

Mortgage Interest vs. Principal payments 

When you pay for a mortgage, the costs are not deductible. Commissions and appraisals are examples of these. Not all of your mortgage payments are tax-deductible after you start making them. This money is not deductible because a portion of each payment goes toward paying down the principal. The amount you pay in interest is tax-deductible.

Every year, your mortgage company would issue you an IRS Form 1098, which displays how much interest you've paid over the course of the year. This is a deductible expense. Your mortgage lender should also notify you if a portion of your payment goes into an escrow account to cover taxes and insurance.

The interest on a home mortgage is disclosed on Schedule A of the 1040 tax form. Schedule E is used to report mortgage interest paid on rental properties that are deductible.

Insurance, Lawn Care, and Local Taxes Deductions

You can deduct certain rental expenses on your tax return if you get rental revenue from the leasing of a housing unit. Mortgage interest, property tax, operational expenses, depreciation, and maintenance are examples of these costs.

You can deduct the costs of managing, conserving, and preserving your rental property as regular and necessary expenses. Ordinary business expenses are those that are known and generally accepted. Interest, taxes, advertising, maintenance, utilities, and insurance are examples of necessary expenses that are judged appropriate.

Many forms of insurance premiums you've bought for your rental property can also be deducted. Landlords can often deduct some of the expenditures of insurance coverage, from flood insurance to landlord liability insurance.

Fortunately, the expenditures of repairing a rental property can be deducted in the year they are finished. It's crucial to remember that the repairs must be routine, necessary, and cost-effective. You can deduct the price of specific materials, supplies, repairs, and maintenance that you do to keep your rental property in excellent working order.

As it applies to your rental business, landlords may be entitled to deduct property taxes, business-related payroll taxes, permit fees/inspection fees, state, county, and local taxes, and personal property tax.