What Landlords Need to Know for Tax Time
This biweekly sponsored column is written by the experts at Gordon James Realty, a D.C.-based property management company that specializes in managing condos, single-family homes and multi-family properties in the metro region. Please submit any questions in the comments section or via email.
(Updated at 10:40 a.m. Saturday) Federal income tax filing season officially began this week.
Though this season isn’t likely to bring cheer, rental property owners have reason to look on the bright side. Landlords actually get many tax advantages that can make the tax pill a little easier to swallow — so make sure you’re getting all the breaks you’re entitled to.
As a landlord, most expenses related to your rental property are deductible. The cost of advertisements listing your rental: deductible. Mortgage interest and real estate taxes: deductible. Same with the property’s electric bills and furnace repairs.
All those deductions help offset your taxable income from your rental property and lower your overall tax bill. Despite this, experts say most rental property owners pay too much each year.
“Taxpayers should ensure they are maximizing every tax benefit possible to offset rental income,” said John Caldwell, managing partner at Malvin Riggins & Company, a CPA firm with local offices in D.C., Virginia and Maryland.
Some of the most common tax benefits for landlords are listed below. But this isn’t tax advice. Please consult a tax professional for information pertaining to your specific situation.
Regular Expenses, Including Mortgage Interest, Property Taxes and Insurance: These costs, along with condo association fees and utility bills, can all typically be deducted.
Depreciation: Because your rental is a place of business, the IRS allows owners to depreciate, or deduct, a percentage of the value of the building (not land) from their taxes, as long as it is used as a rental. Residential rentals are typically depreciated over 27.5 years, allowing an annual deduction of about 3.6 percent of the building’s adjusted cost during each full year of use.
Repairs and Improvements: If you had to send a repair person out to fix the stove three times last year and a plumber finally fixed that drippy faucet, the cost of those and other repairs are deductible. The IRS considers larger projects improvements, such as replacing windows or the water heater or redoing the kitchen. Those costs must be depreciated and deducted over a period of time set by the IRS. For example, the cost of new carpeting for a rental would often be deducted over a five-year period.
Employees and Professional Services: Fees for attorneys, tax preparers, cleaning crews and repair workers are all deductible, as are fees paid to property management companies.
Travel: If you need to drive or fly to check on your rental property, your mileage, plane ticket and other expenses may be deductible if the purpose of the trip is managing the rental.
Home Office: If you’ve set aside part of your home as an office for managing your rental, you may be able to deduct some expenses for that portion of your home.
Losses: There are very specific rules for deducting rental losses incurred, so consult your tax advisor for more detail, Caldwell said.
And as you work on your federal return, don’t forget D.C. landlords also need to file and pay D.C. franchise taxes by April 15. The tax applies to owners with D.C. property that earns $12,000 or more in gross rents. Landlords making less than $1 million in gross rents pay the greater of the actual franchise tax or the minimum franchise tax of $250.
The D.C. tax applies even if the rental generates a federal income tax loss for the year and whether the owner lives in the District or in another state or country, Caldwell said.
The views and opinions expressed in the column are those of the author and do not necessarily reflect the views of HillNow.com.
