Owning property is a huge part of the American dream.
But every year, landlords across the country pay much more taxes on their rental business than necessary. All too often, these taxes take a serious toll on the profitability of their properties.
Fortunately, the United States tax code has many rules that allow landlords to save money and reduce their taxes. Sometimes, it even seems like the IRS is trying to reward landlords for pursuing their property ownership dreams.
So, if you’re a Prince George’s County landlord looking to build wealth by maximizing the profits on your dream, keep reading. In this post, you’ll find the 10 most common deductions available to landlords and learn how you can take advantage of them.
The 10 Most Important Tax Deductions for Maryland Landlords
Perhaps the single biggest deductible expense for a landlord is interest.
Some common examples include:
- Mortgage interest payments on loans to acquire or improve rental property
- Credit card interest on goods or services used for rental activity
Remember that you can only deduct interest on money spent on your rental business. In other words, you can’t deduct the interest of something like a withdrawn line of credit sitting in your bank account.
If you’re a landlord in Prince George’s County, you may or may not have to do lots of traveling – it all depends on where your rental properties are located.
Money you spend on travel to maintain your rental property or to collect rent is deductible.
Travel also comes with business vehicle expenses. You have the option to deduct actual expenses or use the standard mileage rate of 54 cents per business mile driven.
3. Employees and Contractors
Landlords can deduct wages and salaries for their employees – that includes property managers, staff grounds maintenance workers, and contractors like:
These are considered operational expenses, as long as the fees are paid for work directly related to your rental property business.
The cost of a rental property isn’t fully deductible in the year you paid for it. Instead, you’ll get that cost back through depreciation, which is the lost value of a property over time due to wear and tear or obsolescence.
There are three types of costs you need to capitalize on and depreciate:
- The structure’s value
- The value of improvements
- Equipment (including tech)
These expenses can’t be deducted all at once, but must be spread out over the years. If this weren’t the case, people would claim way more than they actually paid on repairs to remove their tax liability altogether. Then they might sell the property to recoup their return on investment.
So, take advantage of depreciation as much as possible for the maximum return on your rental property investment.
Any rental-related insurance premiums are tax-deductible. Think about it this way: if you didn’t own a rental, would you need whatever particular insurance you’re considering?
If your answer is no, that premium is very likely tax deductible.
Insurance policies with deductible premiums include:
- Theft insurance
- Flood insurance
- Worker’s comp insurance
- General liability Insurance
- Personal umbrella insurance
- Homeowner’s insurance
- Mortgage Insurance
- Fire/damage/liability insurance
Tip: Check out this blog post for more information on landlord insurance.
6. Home Office
If you’re a busy landlord in Prince George’s County, you have to work from somewhere. And that place could be anywhere from a spare bedroom to a commercial office space.
Just remember to keep flawless records of the time you spend using that space for rental business. You can deduct expenses related to your office like:
- Legal forms
- Rent paid for the space
- Phone bills
- Square footage
- Pencils, pens, staples, ink, printer paper
- Rental software
Some business owners abuse the home office deduction. Because of this, it’s one of the IRS’s most commonly flagged deductions, so be careful and take your record-keeping seriously. You may even want to consult a Prince George’s County accountant to help you determine exactly what can be deducted.
Utilities you can deduct include:
Think about it like this: any rental property utilities you pay for can be deducted. Even if the tenants reimburse you later, you can still claim utility expenses – you just have to claim that reimbursement as income.
8. Repairs and Maintenance
You may deduct the expense of repairs in any given tax year. Repairs are legally defined as any effort to maintain the current condition of a property or asset.
Notable repairs include:
- Air conditioning repair
- Fixture repairs
- Labor/Contractor costs
- Tool/Equipment rental fees
- Plumbing repairs
Tip: Read this blog post for more information on rental property repairs.
As a rental property business owner, there are lots of taxes and fees you can deduct, including:
- Real estate taxes
- State, county, and city taxes
- Social security taxes for employees
- Permit fees/inspection fees
- Property taxes
- Sales tax on any rental related items that aren’t considered depreciable for the year
- Tax advice and the preparation of tax forms
Remember, real estate taxes are most often paid through the mortgage company and show up on your Form 1098. But if you don’t have a mortgage, you’ll have to look up your tax records online if you haven’t kept receipts of those payments.
If the majority of your time spent in the real estate business is as a real estate professional, your rental losses are not considered passive. As a result, your losses are fully deductible against all income – both passive and non-passive.
Otherwise, your rental property income is considered a passive activity. That limits your ability to claim losses from passive activity against other types of income up to $25,000 if you make under $100,000. You can’t deduct any passive activity loss once your income reaches $150,000.
Here’s an example: If your rental receipts are $12,000 and expenses total $15,000, resulting in a $3,000 loss – and your modified adjusted gross income is below $100,000 – you should be able to deduct the full $3,000 loss.
Before you claim any of these deductions, make sure you have thorough records backing them up. The IRS doesn’t play around when it comes to deductions for landlords, and you have to be as careful as possible in case you get audited.
If you don’t have the proper receipts for your deductions and can’t validate the necessity of each and every expense, the IRS will likely make you pay the amount due – with interest.
Try to avoid such a costly mistake at all costs. If you have more questions, you can call the IRS’s Free Tax Hotline for further assistance.