Landlords: Save Money With These Tax Reduction Strategies

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Owning one or more rental properties is an excellent way to ensure an ongoing income. Knowing the best tax reduction strategies and applying them can make your investment even sweeter.

First, a Note About Record-keeping

To ensure that you can claim as many tax write-offs as possible on your investment property, keep all your receipts–and keep good records.

Keeping your tax records organized and up-to-date will help simplify things at tax time. And, accurate records are important in case the IRS should ever audit. You will need to have receipts for all deductions and be able to show all money received.

Interest

Mortgage interest is tax deductible. Interest paid on loans for repairs, remodeling and renovations is also tax deductible and can give you a nice tax break. And any interest you pay on credit cards for purchases of goods, supplies, and services for your rental property can also go on your taxes as a deduction.

Insurance

Any insurance policies used to cover possible landlord liabilities can also be part of your tax reduction strategy. You can deduct the cost of premiums for fire, theft, and flood insurance.

Participation in Your Business

The IRS has some special tax rules dealing with income and deductions from real estate investments. It differentiates between those who make passive real estate investments and those who invest materially in the property.

People who materially participate in their real estate investment are allowed more deductions than those who do not actively participate. Investopedia says that to claim real estate professional status for tax purposes, you must have material participation of more than 750 hours per year in property trades or businesses. You will need to log your hours to demonstrate that you do not fall under the passive rental activity tax clause.

A real estate professional can escape the net investment income tax on gross rental income and the selling of real estate by participating 500 or more hours in the business. You can also avoid this tax if you have spent more than 500 hours in five of the previous ten years. When you can prove your participation, you will avoid including the income in your net investment income. Again, to escape this tax, you must be able to verify that you spent the correct number of hours.

Once you come under professional status, you can use your real estate losses to offset W2 or 1099 income. By doing this, you can also reduce or eliminate the net investment tax of 3.8 percent.

Depreciation

Calculating the amount of depreciation on your rental property can give you a significant reduction in your taxes. Depreciation only pertains to the value of the buildings–not the land.

Generally, depreciation allows you to reclaim the value of the buildings over 27.5 years, or 39 years for commercial properties. This amounts to about 3.6 percent of the value that you can deduct each year, says USNews.

The full deductions for depreciation are only available for active real estate professionals—unless the depreciation and other deductions are less than your passive income. If you are a passive participant, you are limited to reducing your losses to the amount of your passive income.

Business Write-offs

Running a real estate business can also give you several tax write-offs. You can deduct the following expenses:

• Office space
• Equipment needed to run the office: phones, computers, printers, etc.
• Advertising
• Accounting and legal fees

Employees

If you hire staff to run your office and maintain the property and buildings, your employees’ salaries are tax deductible. You can also deduct the cost of their health insurance and worker’s compensation insurance.

Independent Contractors

Whenever you pay for someone to perform tasks related to your rental real estate business, you can deduct the cost of those services. This includes paying someone to make repairs on your income property, whether it be a plumber, carpenter, electrician, or roofer.

You may also be able to deduct the cost of services from accountants, tax professionals, lawyers, property management companies, and investment advisors.

The IRS has some special rules about hiring independent contractors. Although you do not need to withhold any federal or state taxes, you do need to file IRS form 1099-MISC if you pay an independent contractor more than $600. To do this, you will need to get the contractor’s taxpayer ID number.

Repairs

Rental properties will need repairs sooner or later, and there may be many of them at times. These can be simple repairs that only take a couple of minutes or extensive repairs that take days.

Before deducting repairs, ask whether they are ”ordinary and necessary,” and reasonable. Repairs are only deductible in the year that the expense occurred. It is to your tax advantage to make repairs as needed, rather than waiting and having to make renovations.

Owners of rental properties should know the difference between repairs and capital improvements. A capital improvement adds to the property with the intent to increase its value.

Investopedia says that you cannot deduct the cost of improvements from your taxes. Instead, you need to depreciate the expense over the useful life of the property.

Investopedia also mentions that you cannot depreciate the costs of clearing land, landscaping it, or planting on it, as these costs affect the land rather than the buildings.

The Pass-through Tax Deduction

In 2018, the Tax Cuts and Jobs Act was passed. At present, the provisions of this law will expire on January 1, 2026. The act lets landlords deduct one of the two following options, depending on their income level:

1. Up to 20 percent of their net income from rental properties
2. 5 percent of the initial property cost of the rental and 25 percent of the amount they paid their employees.

These tax reduction strategies can help you keep a lot more money in your pocket—which makes your rental income more profitable. And, of course, when choosing an accountant, look for one who knows how to get the most savings from your rental property at tax time.

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