By learning about effective rental property tax deductions, REALTORS® can increase customer confidence, make buyers happier, and even help to secure return buyers. It makes sense to know your properties and the market, but it is also a good idea to be able to inform your clients about the best ways to reduce costs for running their rental property.
By helping those looking for a rental property to be as successful as possible, you as their agent are likely to increase word of mouth recommendations and the chances of the would-be-landlord returning to make future investments in the rental property sector.
While it is good to find unique ways to attract new clients, it is also a smart move to grow client relationships for repeat business. Of course, helping your clients achieve success is a big part of being a responsible REALTOR®.
Now, before we get into this further, REALTORS® should make it clear that they are not providing tax advice, but simply pointing out some areas of interest that could be of benefit and should be discussed with an accountant or revisor.
Here are some of the main ways in which rental property owners can reduce their tax burdens.
Property Value Depreciation
This is a tax deductible amount that can be claimed annually. However, it should be noted that this is not for the total value of the property, but for the value of the structure only. The land is not included in this calculation.
Property Depreciation Calculation
This is how to calculate the depreciation of a property for tax purposes:
- Obtain the value of the building and the land value independently. The building value is the only value that will be used in this calculation.
- An accountant should work out the permitted tax deductible amount.
- At the time of writing, the IRS permits 1/27.5 x Property Value (IRS depreciation years permitted are 27.5, and only one amount of this value is permitted per year).
For example, if the property was $400,000, the land valued at 225,000 and the building at $175,000, the calculation would be:
1/27.5 x 175,000 = $6,363.64
That is a nice claimable amount to be able to offset against tax costs for the year. In order to be able to claim this, the property must be in reasonable condition, only the owner can claim, and it needs to be a source of income for the owner. By learning about how depreciation works and how it can be claimed, the owner can greatly reduce tax bills.
Until 2025, there are also some income tax deductions available for some rental property owners, depending on their income and setup. Landlords may be able to claim ‘pass-through tax deduction’ if using a company setup where income passes through to the owners or if they are running the rental property as a business.
This deductible amount was setup by the Tax Cuts and Jobs Act. This amount can be for a percentage of the income, or calculated in conjunction with employees, should the property owner have their own staff connected with renting properties (such as collecting payments, making repairs, managing properties etc.).
This may be a surprise, but rental property owners can actually claim tax deductions for the tax paid on the property itself. This is because the rental property is seen largely as being a business, although also being an asset, it allows for the expenses of that business to be claimed.
Almost all states have property taxes. These taxes will be paid first and can then be claimed against any income earned from the rental property. To find the exact amount to be claimed, owners can check with their mortgage providers or go to a local government offices.
Mortgage and Finance Related Deductibles
This is another great area that REALTORS® should make sure potential landlords know about. Rental properties provide numerous ways to reduce tax. However, in this case, even the finances used to buy or improve the property can provide tax benefits.
Firstly, mortgage interest repayments can be filed as a deduction in tax returns. This is not the entire mortgage repayment (if paying off capital and interest), just the interest part. A mortgage company should be able to advise their clients of the amounts and provide supporting evidence, such as in monthly or annual statements.
Interest deductions aren’t only limited to mortgages. If a rental property owner borrows money for improvements such as energy efficiency upgrades or property repairs, the interest on the borrowed money can also be counted as a deductible item.
This means that purchases using finance that incurs interest, such as for items for the property, development of the property, or repairs to the property, will likely be partially deductible. Once again, it is only the interest that is counted as a deductible, but this can be the interest on secured loans, unsecured loans, and even credit cards. Moreover, in some cases the setup fees of loans or mortgages can be counted as well.
Rental Property Upkeep
Although we already covered that interest on loans for property improvement can be deducted, so can many of the costs of making these improvements.
Similar to property value depreciation, in many cases, home improvements follow the same proportional 1/27.5 depreciation in value each year. This is because the property is deemed to depreciate over 27.5 years, and equally so should the value of it’s improvements and updates depreciate over that period.
Cleaning, maintenance, and general upkeep can also be deducted for varying additional tax benefits.
This kind of protection is a must have for most landlords. It is important to make sure the asset, contents, and even the landlords themselves are covered.
Insurances for landlord liability, building insurance, fire, flooding and contents add up to a reasonable amount overall. They are often legally required, and are advisable for rental property owners to have regardless. However, they are also all fortunately fully deductible against taxes.
Unforeseen Expenses or Losses
If a landlord experiences expenses for incidents of theft, damage, or injury to the tenant, they may be able to claim these expense amounts as tax deductible.
Moreover, if a landlord owns numerous properties, but one of them runs at a loss for the tax year (such as due to required repairs), then that loss may be offset against the income of the other rental property’s profits.
Costs of Running a Rental Business
Whether a rental property owner works at home as a solo entrepreneur, or employs an entire team to manage their rental properties, the good news is that most of these expenses can be claimed against tax. The costs of running a rental business is an important and often overlooked are of deductibles.
The rental property is in effect often seen as being ‘a business’, and so the salaries of staff, insurance, contractors, lawyers, and even the office (or home office) may be able to be claimed as expenses against the rental income. When a landlord pays a property agent to rent and maintain the property, the agents fees could be deductible, and so can some contract/lease agreement fees from lawyers and agents.
Even personal property used by the landlord for the rental property business can be claimed, as can travel costs directly related to managing the property. So, if you use your mobile phone or computer for business, don’t forget to mention it to your accountant.
Similarly, if someone is running a home office, they may also be able to claim deductions for costs such as the phone line, internet, and office furnishings and equipment. Basically, almost anything that is being used in connection with the rental business.
Rental Property Utilities
Depending on the lease agreement, sometimes landlords pay utility bills directly for the rental property. If this is the case, then utilities such as water, electric, gas, waste disposal etc. may be able to be claimed as a tax deductible.
A good accountant should be able to confirm exactly which are claimable and which aren’t. To some degree, it will depend upon the lease agreement and whether or not the tenant pays anything towards utilities. If the tenant pays extra to the landlord for any of these, the rental property income figure may need adjusting accordingly.
Self Employment Taxes
Owning a rental property is often not considered to be self employment. For this reason, landlords get the benefit of not needing to pay self employment FICA taxes (Federal Insurance Contributions Act). This is the case for landlords that own properties for the purpose of a rental income.
However, this likely won’t apply to property developers or those that rent out properties temporarily. If considered to be trading in properties, self employment taxes may need to be paid.
How should REALTORS® advise landlords about Rental Property Tax Deductibles?
Although this is a positive area of owning a rental property that landlords should know about, REALTORS® should also be careful about how it is explained. Staying up to date is important, as tax laws and allowances often change.
It is also important they make it clear that they are not giving tax advice, as buyers need to be able to trust REALTORS®.
Providing the possible tax deductibles in writing may be advisable, as a leaflet or document can clearly state that the information provided is not financial advice. REALTORS® can also add their own legal clauses about the information provided.
It is also a good idea to suggest that clients speak with their accountant about these areas, or to give them the contacts of some recommended accountants if they don’t already have one.
The overall trick to explaining the tax situation is to get the owner or would-be-owner to think of the rental property as not being just an investment, but as being an active business. Most of the expenses of a normal business that are deductible against tax are equally deductible against a rental property income.
The above information is believed to be correct at the time of writing. However, this is not tax advice and or landlords should seek qualified tax advice from a registered accountant. We take no responsibility for any errors or inaccuracies in the above article, as it is simply to provide information on the subject.