Landlord Tax Guide
Although landlords may not receive the same tax benefits for owning real property that noninvestment owners receive, landlords may take advantage of other tax incentives that the Internal Revenue Service (IRS) allows for real property owners. The IRS allows landlords to deduct and offset their tax liabilities with special investment tax rules.
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Repairs and Improvements
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Landlords may deduct the cost of repairs that are necessary if the repairs do not increase the basis of the rental property. Property improvements that increase rental value can be deducted over time through the IRS' capitalization and depreciation rules. The IRS requires landlords to deduct the cost of the improvement over the useful life of the rental property. Landlords may deduct the cost of necessary repairs to their rental properties or repairs that do not improve the property's value but are necessary to keep the property in working order.
Business Costs
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Landlords may deduct the costs of their business travel expenses between the landlord's primary residence and the landlord's rental property. Landlords may deduct their legal and tax expenses if they were incurred during the course of producing income. Additionally, landlords may deduct the costs of maintaining homeowner's insurance on their rental properties. Landlords can deduct advertising costs, cleaning expenses and real estate brokerage fees that landlords pay third-party real estate agents to find suitable renters.
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Rental Income
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Landlords must include all rental income generated during the tax year as business income on their 1040 tax returns. However, landlords can take advantage of the federal tax rules allowing offset of taxable income from active losses. Active loss income includes the landlord's inability to generate income during rental vacancies. The IRS only allows active investment owners to take advantage of the federal active loss rules. If the landlord's main business is not renting homes, then the landlord must deduct losses through the federal passive loss rules requiring landlords to defer losses for tax years when the landlord's income is less than the amount of the landlord's total losses. However, landlords can deduct losses as active losses without deferment even in those tax years when the landlord does not generate any net income.
Investment Owner Exceptions
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The IRS does not allow investment owners to deduct interest paid on their monthly mortgage bills. The federal government only allows homeowners to deduct interest on their mortgages for their first homes and second homes used as a vacation home or weekend getaways. Additionally, investment owners may not take advantage of the IRS' rules for tax-free income on the first $250,000 of profit a taxpayer may earn after selling his home.
Considerations
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Since tax laws frequently change, you should not use this information as a substitute for legal or tax advice. Seek advice through a certified accountant or tax attorney licensed to practice law in your jurisdiction.
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References
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