On my first day of college in tax accounting class the teacher said “paying taxes is our American way of life, we have to do it, get over it. Now I am going to teach you how to pay as little as possible.” Below is a blog post on how to look for landlord tax deductions.
The U.S. tax code has many rules that allow rental property owners to save money and reduce their taxes. Owning rental property is part of the American dream and a great investment when purchased well.
In this Post, I am going to point out some good federal tax deductions available to rental property owners.
With that said, (here is my disclaimer) I am not a tax professional, attorney, or CPA. Rather, I’m a property manager trying to educate based on my experience and what I have read.
What Qualifies as an Expense?
There are two types of expenses: Current Expenses and Capital Expenses.
Current Expenses
Generally, these are items that help keep the property in good working condition and habitable, or help you operate your rental business. The entire expense can be deducted from your taxes in the same year that it was incurred – hence “current” expenses. Repairs are generally expected to restore an item to its previous working condition.
To qualify as a current expense, it must be considered:
1. Ordinary and Necessary – those repairs that are common and generally accepted in the business. Necessary expenses are those that are deemed appropriate, such as interest, taxes, advertising, maintenance, and utilities and insurance.
2. Current – the expense must have more short-term value than long-term value. Fixing a hot water heater has short-term value. Replacing the water heater has long-term value.
3. Directly Related to your Rental Activity – The expense must be business related.
4. Reasonable in Amount – If you claim to have paid $500 for a door knob, you will get audited.
Capital Expenses
Anything that increases the value of the property or extends its life is categorized as a “capital expense” or “improvement” and must be capitalized and depreciated over multiple years. If you are adding a new item or upgrading an existing item then it can be a “capital expense”, this is a good rule to follow. Examples are roof replacement, new kitchen water heater etc.
It is presumed that these improvements will add value to the property over multiple years, not just the current year – and thus why you can’t deduct in a single year but taken over time – depreciation.
Before claiming any of these deductions be sure to have detailed and thorough records to back them up and you need to be prepared should you get audited.