During the “Great Recession” of ’08 property prices were plummeting and many people had no way to sell their houses so they rented them instead. Now in 2015 we still see remnants of the shift from homeowner to landlord. If you are one of these “accidental landlords” make sure you are taking all of the deductions you are entitled to. I know you probably weren’t planning on being a landlord but if you are you may as well make the most of it.
Deductible Expenses that Most Rental Properties will have:
• Utilities – All houses have some form of utilities whether it’s water, gas, electric, or trash services. Unless you negotiated for your tenant to put them all in their name you get to deduct them on your Schedule E.
• Taxes – All properties have property taxes associated with them. This expense is rarely paid by the tenant and therefore is deductible by you. This also goes on your schedule E, not on your schedule A as an itemized deduction like it normally would if you still lived in the property.
• Travel Costs incurred while doing business – Yes, your rental property is a business. Trips to the property are not deductible because they are considered commuting mileage. But everything after that is – read our post on deducting business mileage for more details.
• Meal and Expense for Employees – This is often an overlooked expense. You can deduct 50 percent of meal and entertainment expenses incurred while doing business with potential clients or business associates. Meeting with a potential property manager or a tenant? Keep the receipts because you can deduct it.
• Depreciation – This is sometimes not taken because people think it’s complicated. It’s really not that difficult especially with today’s tax software. The building (but not the land) deteriorates over time. While you are keeping everything in good working order, the building, plumbing, roof, and everything else gets older every day. The IRS allows you to take a deduction for this even if it didn’t actually cost you any money during the year. Follow this 8 step article to start taking this valuable deduction. Simply put, you take the value of the property (not including the land) and divide it by 27.5 years (residential real estate).
• Necessary and Reasonable Repairs – If you go fix a leaky faucet you can deduct the materials that you used but not your time. However, you can deduct someone else’s time so if you hire a plumber to fix that leaky faucet you can deduct both time and materials. It might cost more to hire it out but it saves you time and allows you to deduct more on your taxes. Make sure you obtain your contractors’ tax ID numbers (EIN or SSN) because you have to submit a form 1099 informing the IRS how much you paid them. This is only required if you pay them $600 or more.
• Insurance – You should tell your tenants to get renter’s insurance but you also need to keep insurance on the property. You should find a landlord’s policy and make sure the insurance company knows you won’t be living there. The cost of this is also deductible.
Accidental Landlords can Avoid Paying Capital Gains when they Sell
There is a special rule for those of you who lived in your house before renting it out. If you lived in your rental property for two of the last five years prior to selling your house you can actually avoid paying capital gains. This can be thousands of dollars so it might even make sense to move back into the house before you sell it.
Phillip R. Christenson, CFA is a financial adviser and tax preparer for Phillip James Financial an independent Minnesota financial planning company. They are located in Plymouth Minnesota. Visit their financial planning website or their tax website for more information.