Tax time is overwhelming for everyone, but as a property manager or landlord, the lines between property tax, income tax, and business and personal expenses can be extra confusing. Luckily, if you know how to make the most out of your tax deductions, this can work in your favor. Like any business owner, landlords and property managers can deduct expenses related to operating that business. These are known as “necessary expenses.” According to the IRS:
“Necessary expenses are those that are deemed appropriate, such as interest, taxes, advertising, maintenance, utilities, and insurance.”
We’ll take a look at the specific items you may not have thought to include in that category, but first let’s go over some common tax mistakes landlords make, and how to avoid them.
Property Manager Versus Passive Investor
Some tax deductions are only available to those who own and operate the real estate business, not for those who passively invest in the property. If you have any questions or confusion about your role in the real estate business and which deductions you can and cannot take, you may wish to consult an accountant.
Personal Versus Business Expenses
When you’re self-employed, it’s tough to distinguish between personal and business expenses. However, even if it’s unintentional, the IRS has serious consequences for writing off personal expenses as business deductions. To avoid paying a hefty price down the road, make sure to maintain detailed records and separate accounts for your personal and business-related finances. It can be helpful to have separate credit/debit cards for each.
From a property management standpoint, it’s especially easy to blur the line between business and personal expenses if you also live on a rental property that you own. For example, as a landlord, you have the right to take expenses for repairs, maintenance, and improvements to the spaces that you rent out to others, but not for the space that you reserve exclusively for your own personal use. If these spaces are all in the same building, it can be tricky to differentiate between personal and business expenses, but you’ll be better off consulting with a tax specialist now than paying for an audit later on.
Capital Versus Current Expenses
Property management incurs a lot of expenses relating to upkeep and improvement to the buildings and grounds that you own. Some of these expenses are capitalized, which means they depreciate over time, and some are current, meaning that you can take the entire deduction for the current year. As discussed below, the rules regarding deductions for improvements has changed somewhat, and you may wish to consult an accountant if you have uncertainty about whether you must capitalize an expense or can apply it all to the current year. Here are some general guidelines on how to tell the difference between a capital and current expense:
- Repairs to an appliance are generally current expenses, while appliance replacements are generally capital expenses.
- Improvements to your property, i.e. anything that increases its value, such as a renovation, are usually capital expenses, while repairs are generally current expenses.
- There is one exception to the above rule: Improvements to your property to make it accessible to people with disabilities may be deductible for the current year up to $15,000.
8 Underrated Tax Deductions You Should be Taking
Below are some tax deductions available to landlords that many never think to take. While some apply to all businesses, others are specifically applicable to running a real estate business.
1. Green Energy Deductions
Fortunately for you, your tenants, and the environment, the IRS is making it easier to be green. If you own a property four or more stories high and make energy-efficient upgrades to your HVAC system, water heaters, lighting, etc., you may qualify for a deduction of up to $1.80 per square foot. You can find other tax credits you may qualify for in the Department of Energy’s list of Tax Incentives for Energy Efficiency Upgrades in Commercial Buildings.
2. Home Office
If you devote a small area of your home, such as a spare bedroom that you’re not otherwise using, strictly to conducting business, you can claim it as a home office and deduct some of the utilities that you pay for your home as business expenses. Be careful with this claim, however, because you must carefully document the time spent using the space for business in order to calculate your deduction without raiding red flags with the IRS. If you live off site and commute to your rental property, you can also deduct the mileage it takes to drive from your home office to the rental site.
As mentioned above, you can deduct the mileage traveled between your rental property and your home office, but that’s not all. Mileage for your trips to the bank for business transactions, the hardware store for tools and supplies, the courthouse, or to business meetings can all be deducted if your starting point is your home office.
4. Property Depreciation
The most difficult part of being a landlord or property manager is also one of the best part of paying taxes as one: buildings decay over time. Because buildings lose value as they age, you can write the depreciated value (1/27.5) off on your taxes as an expense. This means you can effectively write off the entire cost of the building, though it must be spread over 27.5 years.
5. Business Tools & Software
In most cases, the software that’s critical to your business function is deductible as well. For example, if you use Checkr to background check all of your plumbers, or Bunker Enterprise to manage the certificates of insurance for your handymen, tenants, realtors, etc., you can deduct a portion of the cost or subscription fee.
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Obviously, this applies to office supplies that you use to run your business (pens, paper, toner, etc.), but it also applies to incidental materials that you keep on hand for the benefit of your tenants, such as extra locks or light bulbs.
7. Startup & Organization Expenses
Starting a new business can cost a lot of money. The IRS understands this and allows you to deduct certain costs to improve your cash flow. Costs to start up a new business or to organize into a new business structure, such as a corporation or an LLC, are deductible up to $5,000 for the first year, with the remainder deductible over a five-year period.
8. Business Insurance
Any insurance you buy for your business is tax deductible. Though not technically a business expense, your health insurance is also 100 percent deductible if you’re self employed. If you use your vehicle for business purposes, you can also likely deduct a percentage of your auto insurance premium. Similar to a home office or other “grey areas,” it will be important to document how often you’re using the vehicle for business as opposed to personal reasons. Your business insurance (or liability insurance) policy likely includes General Liability, Professional Liability, Cyber, and Property. If you have employees, your workers’ compensation cost will be deductible as well.
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If you’re working with independent contractors, the cost of their insurance will not be deductible, as they’ll legally have to cover it themselves. However, the software you use to manage their certificates of insurance may be deductible. The general rule here is that it has to be necessary to your business, and not to your personal life. Tools like Bunker Enterprise, which you can demonstrate are vital to the safety of your business, will likely be deductible. Your Spotify subscription will not be deductible, no matter how many albums you stream from your office.
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This article does not constitute legal advice. If you’re unsure whether a particular deduction or credit applies to you, consult with a lawyer or tax specialist.