Your tax return is due by April 18, 2011 (the deadline was extended three days this year because of weekends and holidays).
If you haven’t filed yet, and are a rental property owner, make sure you haven’t forgotten the following 10 tax deductions.
Top Ten Tax Deductions for Landlords in MN
Every year, landlords pay more taxes on their rental income than they have to. Why? Because they fail to take advantage of all the tax deductions available for owners of rental property. Rental real estate provides more tax benefits than almost any other investment.
Often, these benefits make the difference between losing money and earning a profit on a rental property. Here are the top ten tax deductions for owners of small residential rental property.
Interest often turns out to be the biggest deductible expense. some examples of interest that landlords can deduct include mortgage interest payments on loans used to buy or improve rental property and interest accumulated on credit cards for goods or services used to pay for rentals.
The purchase of a house, apartment building, or any other rental property is typically not fully deductible in the year in which you pay for it; however, landlords get back the cost of real estate through depreciation. Depreciation is a way of deducting a portion of the cost or purchase of the property over a number of years.
The cost of repairs to rental property will be deductible in the year in which they are paid for. Examples of deductible repairs include repainting, fixing gutters, siding, floors, fixing leaks, plastering, and replacing broken windows.
4. Local Travel
Landlords are entitled to a tax deduction whenever they drive anywhere for their rental activity. For example, when you drive to your rental building to deal with a tenant complaint or go to the hardware store to purchase a part for a repair, you can deduct your travel expenses.
If you drive a car, SUV, van, pickup, or panel truck for your rental activity (as most landlords do), you have two options for deducting your vehicle expenses. You can:
- deduct your actual expenses (gasoline, upkeep, repairs), or
- use the standard mileage rate (51 cents per mile for 2011; up from 50 cents per mile in 2010). To qualify for the standard mileage rate, you must use the standard mileage method the first year you use a car for your business activity. Moreover, you can’t use the standard mileage rate if you have claimed accelerated depreciation deductions in prior years, or have taken a Section 179 deduction for the vehicle.
5. Long Distance Travel
If you travel overnight for your rental activity, you can deduct your airfare, hotel bills, meals, and other expenses. If you plan your trip carefully, you can even mix landlord business with pleasure and still take a deduction.
However, IRS auditors closely scrutinize deductions for overnight travel — and many taxpayers get caught claiming these deductions without proper records to back them up. To stay within the law (and avoid unwanted attention from the IRS), you need to properly document your long distance travel expenses.
6. Home Office
Provided they meet certain minimal requirements, landlords may deduct their home office expenses from their taxable income. This deduction applies not only to space devoted to office work, but also to a workshop or any other home workspace you use for your rental business. This is true whether you own your home or apartment or are a renter.
7. Employees and Independent Contractors
Whenever you hire anyone to perform services for your rental activity, you can deduct their wages as a rental business expense. This is so whether the worker is an employee (for example, a resident manager) or an independent contractor (for example, a repair person).
8. Casualty and Theft Losses
If your rental property is damaged or destroyed from a sudden event like a fire or flood, you may be able to obtain a tax deduction for all or part of your loss. These types of losses are called casualty losses. You usually won’t be able to deduct the entire cost of property damaged or destroyed by a casualty. How much you may deduct depends on how much of your property was destroyed and whether the loss was covered by insurance.
You can deduct the premiums you pay for almost any insurance for your rental activity. This includes fire, theft, and flood insurance for rental property, as well as landlord liability insurance. And if you have employees, you can deduct the cost of their health and workers’ compensation insurance.
10. Legal and Professional Services
Finally, you can deduct fees that you pay to attorneys, accountants, property management companies, real estate investment advisors, and other professionals. You can deduct these fees as operating expenses as long as the fees are paid for work related to your rental activity.
Did You Know?
- Landlords can greatly increase the depreciation deductions they receive the first few years they own rental property by using segmented depreciation.
- Careful planning can permit you to deduct, in a single year, the cost of improvements to rental property that you would otherwise have to deduct over 27.5 years.
- You can rent out a vacation home tax-free, in some cases.
- Most small landlords can deduct up to $25,000 in rental property losses each year.
- A special tax rule permits some landlords to deduct 100% of their rental property losses every year, no matter how much.
- People who rent property to their family or friends can lose virtually all of their tax deductions.
Please consult your tax professional for tax advice. If you need a tax professional with experience in rental properties, please contact me for a qualified referral. I just filed my taxes yesterday. It is always great to see the tax benefits property ownership brings me, on paper. Have you filed yours yet?