With tax season technically starting in just a few days, investors must prepare to file taxes. This time can be highly stressful and challenging for individuals to navigate without help from tax professionals. That said, there are a ton of valuable tax write-offs for real estate investors.
Property owners are responsible for filing taxes correctly to ensure compliance. So, if you own a rental business and need help figuring out what counts as a tax write-off, just keep reading. Here, we’ll go over some of the top tax write-offs for real estate investors.
Claiming Tax Deductions for Rental Properties
Owning rental properties poses many benefits, especially during tax time. So, to obtain all the tax benefits possible, it’s essential to claim deductions accurately. The first step to compliance is understanding the laws and how deductions work.
The first step to claiming deductions on your rental is filling out a Schedule E form. Keep in mind that you must show proof of every transaction you claim or try to deduct when filing taxes. That said, it can get confusing and complicated when you try to file taxes on your own. So, hiring an accountant or a tax professional can be highly beneficial during this time. After all, your end goal is obtaining your maximum refund while avoiding audits or compliance issues.
To get tax advice, reach out to an accountant, tax specialist, or financial advisor who can help you understand all the forms. Similarly, these professionals can help you stay organized as you navigate all the requirements.
That said, if you have a property management team, you can enjoy the benefits of tax help and management help. Hiring a full-service management team can help you keep track of finances, taxes, and records while simultaneously managing your rental business.
What is Rental Income?
To report the correct information during tax time, we must define a few things first. Otherwise, individuals who misreport their income may receive an audit, which nobody wants. So, what is rental income? Here are some examples of what you should register as rental income:
- Monthly Rental Payments- Monthly rent paid by tenants is rental income.
- Expenses Paid by the Tenant- When a tenant pays for services as part of their rent, it’s rental income.
- Services for Money Trades- If tenants “work off” a portion of their rental payment, it’s considered rental income at fair market value.
- Security Deposit Funds- If landlords hold any portion of a tenant’s security deposit, it’s considered rental income for tax purposes.
Now that we’ve established four ways that landlords can obtain rental income, stick with us while we go over what landlords may write off at tax time.
Top Tax Write-Offs for Real Estate Investors
Maximizing all the potential tax write-offs for investors is a large part of creating a successful rental business. That said, rental business owners can take advantage of various tax benefits for rental investments compared to other investments.
So, to give you a head start on your tax planning, we’ve provided a list of the top tax write-offs for real estate investors.
- Employees or Independent Contractors
- Professional Legal Services
- Pass-Through Tax Deduction
- Personal Property
- Home Repairs
- Home Office Usage
- Travel Expenses
One tax write-off that’s usually important for investors includes interest. Interest deductions may consist of interest on mortgage loans used to buy or renovate the rental property. Similarly, landlords can deduct interest from credit cards used to purchase goods or services for the property.
Employees or Independent Contractors
If you hire an independent contractor, vendor, or other professional to perform rental business tasks, you can deduct their wages. That said, keep in mind that it counts as a business expense for tax purposes. So, landlords are permitted to write off employee wages, whether it’s a repairman or a property manager.
Insurance policy premiums for your rental business are also tax-deductible. Some of the most common policies include landlord liability, fire, theft, or flood insurance. Similarly, landlords may deduct health insurance or workers’ compensation expenses if you hire employees to work for your rental business.
Professional or Legal Services
Rental business owners are entitled to write-off fees paid to professional or legal services. These services may include accounting help, financial advisors, or tax specialists. That said, all the costs you deduct must be directly related to your business. Along with that, rental owners can deduct management fees since it’s considered a professional service.
A favored tax write-off for investors is depreciation. This tax benefit allows rental business wonders to get back a part of investment costs over several years.
However, property investors may not fully deduct the costs of single-family homes, multi-family homes, or other rental spaces in the year it’s purchased. So, if you’re an investor and want to take advantage of depreciation write-offs, check out this article on rental property depreciation.
Pass-Through Tax Deduction
Established by the Tax Cuts and Jobs Act in 2018, this unique tax write-off allows landlords to deduct one of the following, depending on income:
- Up to 20% of Net Rental Income
- 5% of Initial Property Cost + 25% of Amount Owners Pay Employees
That said, this write-off will expire on January 1, 2026, unless extended further by Congress.
Not often, but sometimes, landlords use their personal property either inside or outside their rental homes. Examples of landlord personal property include:
- Yard maintenance equipment
Landlords can deduct these items and others that apply within the given tax year. That said, deductions only apply to property items costing up to $2,000.
Repairs to the rental property are another great tax-write-off for investors. For it to count as a deduction, repairs must be reasonable and necessary for the property. Similarly, repairs are only applicable for deduction within the year they occur. Some common repairs in rental homes include:
- Fixing a leak
- Patching the roof
- Repainting the interior
Home Office Usage
If you work or manage your rental business from home, landlords can claim allowances for home office usage. Although this write-off isn’t as common as others, it can benefit rental business owners.
Landlords may be authorized to deduct office work expenses, workshop spaces, or other rooms in their homes dedicated to their rental business.
Landlords that own one or more rental homes across many counties likely do a lot of traveling. When you have showings, repairs, or other requirements at your property, landlords must travel frequently. So, to get some of these expenses back, investors can deduct driving and travel costs related to their business.
Depending on your mode of transportation, the benefits can quickly pile up. If you have a vehicle dedicated to maintenance or rental property use, you can deduct expenses for that. Other deductibles may include:
- Vehicle maintenance
- Vehicle repairs
- Standard mileage
Need Help Maximizing Tax Benefits?
The end of the year is inevitably a stressful and busy time for most people, especially rental investors. Most landlords aren’t prepared to handle tax audits or issues with compliance. So, to avoid any complications during tax season, investors should look into hiring a qualified accountant or other tax professional. Along with that, hiring a property management company is a great way to explore the best tax write-offs for real estate investors.
With our team of professional property managers in Northern Virginia, you can feel confident that you’re getting the most out of your rental investment. Here at BMG, we understand how stressful it can be to own and manage real estate. So, we can take care of all the day-to-day tasks, such as tenant screening, paperwork, eviction filings, and much more. So, whether you have one property or 100, contact us today if you need assistance managing your rental business.