Consistent tracking of income and expense records isn’t the most stimulating task that real estate property management companies and landlords handle, but it is at the top of the list of priorities. In most cases, property owners are entitled to deduct expenses of up to $25,000 each year from their taxable income, which means that keeping accurate records is critical to making sure nothing is left on the table.
When calculating the property owner’s tax deductions, what expenses can be deducted? Below is detailed information regarding 8 important tax-deductible expenses that property owners can leverage to minimize their income tax obligation at the end of the year and look at software this article, we explore 8 major tax-deductible expenses that real estate property management companies can take advantage of to minimize their income tax bill at the end of the year and look at software options for rental property management that helps track income and expenses to avoid potentially costly mistakes.
The costs of making improvements on a rental property are not deductible but the costs of repairs and general maintenance can be deducted—basically, any expenses necessary to maintain the property’s condition are deductible. These expenditures must be considered necessary, reasonable and standard.
Below are some examples of standard maintenance and repair costs:
- Gardening/landscaping/tree trimming
- Pest control
- Plumbing repairs
- Pool maintenance and cleaning
- Rental of necessary tools and equipment
- Replacing broken windows
Three principle expenses for which interest is tax-deductible include:
1. Interest on mortgage payments. The mortgage itself is not deductible.
2. Interest on loans financed for property improvements. The actual costs incurred for property improvements are not tax-deductible.
3. Interest on credit card payments applied to goods and services for a rental property. Interest on these items can add up quickly, making the ability to offset these payments against the property owner’s taxes potentially valuable.
A property’s value can be depreciated over a period of 27.5 years and deducted against the property’s profits. For example, a property owner with a property worth $150,000 would be able to deduct $5,454.54 each year for 27.5 years until the property is fully deducted.
Nevertheless, the two following provisions are worth noting:
- The IRS will claim a portion of the depreciated value back upon the sale of the property, a provision called depreciation recapture.
- Only the value of the property itself is depreciable. The land on which the property stands is not depreciable.
The cost of any items or furnishings owned by the property owner and used in the rental property can be deducted. For example, any furnishings or appliances such as a refrigerator, freezer, dishwasher, etc.
The cost of personal property used in a rental activity can usually be deducted in one year using the de minimis safe harbor deduction (for items costing up to $2,000) or 100 percent bonus depreciation, which will remain in effect until 2022.
Property owners are entitled to deduct travel expenses when traveling to their rental property for the purposes of managing and maintaining their property. For example, travel expenses incurred when driving to a rental property to perform a routine inspection or deal with a maintenance request are deductible. The standard mileage rate that can be deducted for 2020 is 57.5 cents per mile.
It’s important to note that property owners cannot deduct travel expenses when the reason for travel is to make improvements to the property. Instead, these expenses must be added to the property’s tax basis and depreciated with the property over 27.5 years.
Property owners may also be able to deduct expenses when traveling overnight including airfare and hotel bills. These types of expenses are closely scrutinized, which is why it’s so important to keep excellent records.
Pass through tax deduction, formally known as the Section 199a Qualified Business Income Deduction, is part of the Tax Cuts and Jobs Act, which went into effect in the 2018 tax year. The end goal is to encourage Americans to start small businesses and engage in other entrepreneurial ventures.
At a basic level pass-through tax deduction lets U.S. taxpayers deduct as much as 20 percent of their business income that comes from “pass-through” entities such as:
- Sole Proprietor;
- S Corporations;
- C Corporations.
This deduction is scheduled to expire after 2025.
Property owners who employ a property management company or use property management software to help manage their property may be able to deduct this as a business expense. Additionally, other expenses that are often deductible include listing fees and expenses.
Legal Fees and Services
The final item on this list involved the fees property owners pay to accountants, attorneys or other professionals and advisors that help with running and management of the real estate business.
Property owners can deduct these fees as operating expenses as long as the fees are paid for work related to rental activity.
This also covers any costs for legal actions required to recover unpaid rent.
Visit the IRS Website for more information.
There are many miscellaneous costs that are part and parcel with owning rental property. These costs can add up quickly. However, as mentioned earlier, the IRS allows most rental property owners to deduct up to $25,000 from their taxes to ease their cost burden and help real estate property management companies grow profitable businesses.