One of the most effective ways to save your business money as a landlord is by utilizing the tax deductions available.
Knowing which deductions you qualify for and how to use them will greatly improve your profit margin.
Here are some key tax deductions all landlords should know about:
Home Office Deduction
Many landlords these days run their rental business remotely. If this is you, there’s a good chance you qualify for the home office deduction.
If you have a home office in a spare room, a den, a garage, or another building on your property, you can deduct some of your home expenses as business expenses. Here’s how to know whether you qualify:
- You must be considered a business for tax purposes
- Your home office must be used specifically for business activities
- You must use your home office regularly
- You must meet one of these four requirements:
- You consistently and exclusively perform your rental activities in your home office.
- Your most important business activities are conducted in your home office.
- You use a separate building on your property specifically for rental activities.
- You hold business meetings or meet with key stakeholders, such as tenants, in your home office.
Casualty Loss Deductions
If your property suffers damage or loss due to theft, vandalism, a natural disaster, or an accident, you may receive a casualty loss deduction. To qualify as a casualty loss, the damage must happen suddenly and unexpectedly.
Expenses for normal wear and tear or gradual deterioration cannot be deducted as casualty losses. You can, however, use the casualty loss deduction to deduct the expenses of a tree falling on your roof during a violent storm, for example.
Car and Local Transportation Deductions
Local trips made for rental activities can be deducted with car and local transportation deductions. This means you can deduct day trips to and from:
- Your rental property
- Your prominent place of business (including a home office)
- A store to buy supplies specifically for real estate purposes
- Locations for meeting tenants, lawyers, vendors, etc.
- The dump for taking garbage from rental properties
- A local college to receive education about landlord-related activities
There are two ways to deduct local transportation expenses. The first is to use the standard mileage rate, which is a rate set by the IRS that you deduct for every mile you drive for business purposes. With that being said, what is the standard mileage rate for 2022? Currently, it’s 62.5 cents per mile. You must use the standard mileage rate in the first year you use the car for rental activities, or you won’t be able to use it in the future. You also cannot use the standard mileage rate if you use more than five cars simultaneously for rental activity.
The second way to deduct local transportation expenses is by using the actual expense method. This involves keeping track of the expenses of operating your car for rental purposes, such as gas, oil, repairs and maintenance, insurance, lease payments, tires, etc. You can only deduct expenses by the percentage you use your car for business purposes. This method involves keeping precise records of all your expenses, so it’s generally more labor-intensive than using the standard mileage rate.
Rental Loss Deductions
When your expenses exceed the amount you bring in via rent and other revenue sources from owning rental properties, you experience a rental loss. Most new landlords experience a rental loss at the end of the year.
The good news is you can deduct your losses with rental loss deductions. You must, however, follow the passive loss rule. For context, rent is a form of passive income, while a day job is considered active income, and investments are considered portfolio income. The passive loss rule allows you to only deduct rental loss from your passive income. You can’t deduct it from the active or portfolio categories. With that being said, the $25,000 offset and real estate profession exemption are exceptions to this rule that you may be able to take advantage of.
Whether you’re new to owning rental properties or a seasoned vet, understanding the tax deductions at your disposal is a crucial way to save money as a landlord. You probably qualify for one or more of the deductions outlined in this article, so if you haven’t taken advantage of them yet, make sure you do so this tax season.