We would love to tell you that doing your taxes as a landlord is quick, simple, and stress-free, but unfortunately, it’s usually not. There are small, easy-to-miss details that can make a huge impact, and tax laws are constantly changing. If you want to capitalize on your investment, you’ll need to take advantage of the following tips.
- Deduct Costs for Contractors
Whenever you hire a worker to assist you, whether it is a full-time property manager or just an electrician coming to repair an old ceiling fan, you can deduct their wages and list the costs as a business expense for your rental.
- Deduct Repair Costs
If you decide to fix your rental property by yourself, you can deduct the repair cost during the year that it was performed. For instance, if you replace a furnace in 2019, you can deduct the cost of the new furnace from your 2019 taxes. The same goes for small projects like painting or landscaping. Make sure to keep all relevant receipts and paperwork.
- Understand Depreciation
As a real estate investor or landlord, listing depreciation can help you immensely with your taxes. Age, wear and tear, and deterioration create a loss of value in your investment. To offset this, landlords can cut their reportable net income. To calculate your investments depreciation, you take a tax deduction based on the decreased property value over a 27.5 year period. The formula for your yearly deduction is the cost of the building minus the cost of the land divided by 27.5.
For example, if your property is worth $100,000, and the land is worth $20,000, your building value is $80,000. This is also the amount you would have to provide insurance on. Divide that by 27.5 to get your yearly deduction of $2,909.
Be aware that if you sell your property for more than the depreciated value, the previous depreciation may be added back into your taxable income, resulting in a large tax hit in areas with rising home values.
- Deduct Professional Service Fees
If you employ the services of a lawyer to help draft a lease, or if you hire an account at the end of the year to help you navigate difficult rental tax laws, you can deduct their fees from your rental revenues.
- Deduct Your Home Office
Even if you don’t consider your real estate ventures as a home business, you can still have a home office. This may be an entire room or a desk dedicated to real estate ventures, as long as it is used exclusively for your business.