Tax Deductions for Landlord Responsibilities
Besides providing a tenant with habitable premises, part of being a landlord also entails some financial responsibilities. The rental business requires a landlord to pay taxes on the yearly income received from rental property. A landlord can reduce tax responsibilities by taking deductions for the cost of doing business, however. The IRS allows a landlord to deduct operating expenses from their reported income. An operating expense qualifies under the tax code if:
- The expense is ordinary and necessary to the operation of the rental property
- It is a current operating expense
- The expense relates directly to the operation of the rental
- The amount of the expense is reasonable
The following list contains the most typical types of tax deductions a landlord may take.
A landlord may deduct interest on the money borrowed for the rental investment. The most common type of deductible interest is mortgage interest from a bank loan received for the purchase of the property or for improvements made to the property. Other types of allowable interest include interest on credit cards and personal loans used for activities related to the rental property.
Because landlord responsibilities include fixing items in need of repair in a rental, repair expenses are usually a significant operating expense. A landlord can receive the full deduction for the repair during the tax year it was made if it:
- Does not materially add value to the rental property
- Does not substantially prolong the life of the rental property or make it more useful.
Repairs that typically qualify include repainting, fixing a leak in the roof, and fixing portions of a damaged floor. In order to qualify for a deduction, a repair should only restore the property to the original condition it was in before the need for restoration.
An improvement will add value, prolong the life of a property, or make it more useful than it was before the improvement. Unlike a repair, an improvement is ineligible for a full deduction in a single year. Instead, the cost of making the improvement to the residential rental property is depreciated over 27.5 years.
Transportation expenses from local trips related to rental business activity are deductible during the same year incurred. This includes trips that involve driving to the rental property, to the store for supplies, and to the bank.
When making a deduction for miles driven for rental business activity, a landlord can use the standard mileage rate or the actual expense method. The standard method calculates the deduction by multiplying the miles traveled for rental business and the IRS' rate, which changes yearly (.50 cents per mile in 2010). To qualify for the standard method, a landlord must use it during the first year that the vehicle was used in rental business activity. The actual expense method allows a landlord to deduct the actual vehicle expenses, plus depreciation.
A landlord can deduct the expenses incurred for long distance travel away from home on overnight rental-related business. Expenses are deductible if:
- The long distance travel is away from the city or the area of the principle place of the rental business; and
- The trip was primarily for conducting rental business, such as showing the rental to prospective tenants, taking care of maintenance requests, and attending trade shows.
Deductible expenses typically include the costs for transportation, meals, and lodging.
Premiums paid for insurance on rental property are deductible. A landlord may deduct liability insurance, as well as insurance for fire, theft, and flood. A landlord may also be able to deduct insurance paid on a home office and a vehicle.
Casualty and Theft Losses
The destruction or damage to a rental property from a sudden or unexpected event like a fire, earthquake, flood, vandalism, or theft may be deductible. The entire cost of the loss, however, is not typically deductible. The amount eligible for deduction depends on several factors, such as the amount of the insurance proceeds and whether the property was partially or completely destroyed.
A landlord may deduct state and local property taxes paid on a rental for the current year. Prepaid taxes are only deductible in the year in which they are due.
Employees and Contractors
A landlord can deduct wages and compensation paid to independent contractors and employees to perform services related to the rental business. This includes payments made to a contractor hired to perform maintenance work as well as payments in the form of free rent to a resident manager.
Professional Services Fees
Fees paid for the professional services of attorneys, accountants, and property managers are deductible when related to the rental business.
A landlord may qualify for a deduction for a home office. In general, the home office must meet the following IRS requirements:
- The home office is used exclusively and regularly as the principle place of the rental business; or
- The home office is used exclusively and regularly to meet with rental-related visitors; or
- A separate structure on the property is used exclusively and regularly in connection with the rental business.