Tag Archives: rental income

Top 10 Tax Deductions for Landlords

Every year, millions of landlords pay more taxes on their rental income than they have to. Why? Because they fail to take advantage of all the tax deductions available for owners of rental property. Rental real estate provides more tax benefits than almost any other investment.

Often, these benefits make the difference between losing money and earning a profit on a rental property. Here are the top ten tax deductions for owners of small residential rental property.

1. Interest

Interest is often a landlord’s single biggest deductible expense. Common examples of interest that landlords can deduct include mortgage interest payments on loans used to acquire or improve rental property and interest on credit cards for goods or services used in a rental activity.

2. Depreciation

The actual cost of a house, apartment building, or other rental property is not fully deductible in the year in which you pay for it. Instead, landlords get back the cost of real estate through depreciation. This involves deducting a portion of the cost of the property over several years.

3. Repairs

The cost of repairs to rental property (provided the repairs are ordinary, necessary, and reasonable in amount) are fully deductible in the year in which they are incurred. Good examples of deductible repairs include repainting, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows.

4. Local Travel

Landlords are entitled to a tax deduction whenever they drive anywhere for their rental activity. For example, when you drive to your rental building to deal with a tenant complaint or go to the hardware store to purchase a part for a repair, you can deduct your travel expenses.

If you drive a car, SUV, van, pickup, or panel truck for your rental activity (as most landlords do), you have two options for deducting your vehicle expenses. You can:

  • deduct your actual expenses (gasoline, upkeep, repairs), or
  • use the standard mileage rate (55 cents per mile for 2009; 58.5 cents per mile for July 1, 2008 through December 31, 2008 and 50.5 cents per mile from January 1, 2008 through June 30, 2008). To qualify for the standard mileage rate, you must use the standard mileage method the first year you use a car for your business activity. Moreover, you can’t use the standard mileage rate if you have claimed accelerated depreciation deductions in prior years, or have taken a Section 179 deduction for the vehicle.

5. Long Distance Travel

If you travel overnight for your rental activity, you can deduct your airfare, hotel bills, meals, and other expenses. If you plan your trip carefully, you can even mix landlord business with pleasure and still take a deduction.

However, IRS auditors closely scrutinize deductions for overnight travel — and many taxpayers get caught claiming these deductions without proper records to back them up. To stay within the law (and avoid unwanted attention from the IRS), you need to properly document your long distance travel expenses.

6. Home Office

Provided they meet certain minimal requirements, landlords may deduct their home office expenses from their taxable income. This deduction applies not only to space devoted to office work, but also to a workshop or any other home workspace you use for your rental business. This is true whether you own your home or apartment or are a renter.

For the ins and outs on taking the home office deduction, see Home Business Tax Deductions: Keep What You Earnor Every Landlord’s Tax Deduction Guide, both by Stephen Fishman (Nolo).

7. Employees and Independent Contractors

Whenever you hire anyone to perform services for your rental activity, you can deduct their wages as a rental business expense. This is so whether the worker is an employee (for example, a resident manager) or an independent contractor (for example, a repair person).

8. Casualty and Theft Losses

If your rental property is damaged or destroyed from a sudden event like a fire or flood, you may be able to obtain a tax deduction for all or part of your loss. These types of losses are called casualty losses. You usually won’t be able to deduct the entire cost of property damaged or destroyed by a casualty. How much you may deduct depends on how much of your property was destroyed and whether the loss was covered by insurance.

9. Insurance

You can deduct the premiums you pay for almost any insurance for your rental activity. This includes fire, theft, and flood insurance for rental property, as well as landlord liability insurance. And if you have employees, you can deduct the cost of their health and workers’ compensation insurance.

10. Legal and Professional Services

Finally, you can deduct fees that you pay to attorneys, accountants, property management companies, real estate investment advisors, and other professionals. You can deduct these fees as operating expenses as long as the fees are paid for work related to your rental activity.

Did You Know?

Did you know that:

  • Landlords can greatly increase the depreciation deductions they receive the first few years they own rental property by using segmented depreciation.
  • Careful planning can permit you to deduct, in a single year, the cost of improvements to rental property that you would otherwise have to deduct over 27.5 years.
  • You can rent out a vacation home tax-free, in some cases.
  • Most small landlords can deduct up to $25,000 in rental property losses each year.
  • A special tax rule permits some landlords to deduct 100% of their rental property losses every year, no matter how much.
  • People who rent property to their family or friends can lose virtually all of their tax deductions.

If you didn’t know one or more of these facts, you could be paying far more tax than you need to.

by: Stephen Fishman , J.D.

Silicon Valley apartment rents nudge upward

After sliding since late 2008, apartment rents climbed in the first quarter of this year in Santa Clara and San Mateo counties — the latest sign that the region’s economy is stabilizing.

The average monthly rent for all types of apartments in large complexes climbed to $1,510 in Santa Clara County, up nearly 2 percent from $1,482 in the fourth quarter of 2009, according to a report from RealFacts. The company, which tracks rents and occupancy rates in apartment complexes of at least 50 units, said San Mateo County’s average rent inched up to $1,636 from $1,628, an increase of half a percent.

Despite the slight increases, rents are still lower than in the first quarter of 2009, when Santa Clara County’s average was $1,613, and San Mateo County’s was $1,741.

In the Bay Area and across the country, rents peaked in the third quarter of 2008, then fell as unemployment deepened.

“What’s been affecting rents and occupancy is really the economic climate that’s affecting the entire country,” said Sarah Bridge, owner of RealFacts, which is based in Marin County. With modest improvements in the economy and job creation, she said, demand for apartments has increased and rents have followed — modestly.

“My guess is we’re not going to go back down,” she said, referring to the uptick in Silicon Valley and Peninsula rents after five quarters of decline. “We’ll either level off, or there will be a continued increase in asking rents and occupancy.”

Bridge said renting a unit in a large complex is more attractive to some renters now because the move-in costs can be less than when renting from a small landlord. Property managers at large complexes will cut back on the usual security deposit to help fill up their buildings, but smaller landlords often can’t take that risk, and still require hefty deposits. At a time when many people don’t have a lot of cash on hand, she said, “some people will just say, ‘Hey, I’ll take the $99 move-in special, thank you’,” even though they might otherwise prefer renting a house.

But West San Jose resident Kapil Sethi, who has been looking for a new place to rent for about six weeks, said he has not seen many large landlords offer such incentives these days, at least in the West Valley neighborhoods he’s focusing on. He and his family have toured units in large complexes as well as single-family houses, which is what Sethi said he prefers to rent. Not only has he noticed that rents have begun to rise in the well-appointed apartment complexes, but “goodies like the first month free, that’s also stopped,” he said. “Last year there were plenty of them.”

Rents for houses in the neighborhoods he likes have not increased, he said. Right now he’s paying $2,000 a month, having talked his landlord down from $2,200 last summer. Now one of the landlord’s relatives is moving in, and Sethi and his wife and kids need to move. Sethi said he thinks he’ll be able to find a three-bedroom place with a nice backyard for $2,000 or so now.

“I think it’s still a buyer’s market,” he said. “The market is warming up, but there are still plenty of homes available.”

Economist Matthew Anderson of Foresight Analytics in Oakland called the increases in rent and occupancy positive signs for Silicon Valley and the Bay Area economy in general. But he cautioned against pinning too much hope on an indicator like rising rents.

The rate of occupancy also increased locally in the first quarter, according to RealFacts. Large complexes in Santa Clara County were 95.5 percent occupied last quarter, up from 94.7 percent in the fourth quarter of 2009. In San Mateo, the occupancy rate went from 94.6 percent to 95.2 percent. Landlords generally believe they can raise rents when their properties are at least 95 percent full. The recent peak for occupancy in both counties was in the first half of 2008, at 96.5 percent.

Rents in Los Angeles/Long Beach/Santa Ana, with an average monthly rent of $1,536, were the most expensive of the 41 metropolitan areas nationwide surveyed by RealFacts. The San Jose and San Francisco metro areas tied for second with average monthly rents of $1,513. (The San Jose metro area includes Santa Clara and San Benito counties; the San Francisco area includes San Francisco, San Mateo, Marin, Alameda and Contra Costa counties.)

By Sue McAllister of Mercury News