Renting out one's home is no picnic. It's true that earning some passive income feels wonderful. However, like any other job, being a landlord also comes with great responsibilities.
Apart from managing your rental property, there are also a lot of extra tasks that you have to do. This includes all the difficult tax laws, rules, and expenses that your rental business can claim.
The problem usually happens when you are having a hard time figuring out rental expense deductions. Plus, you also have to keep accurate records and keep up with the always-changing tax rules.
This being said, we know that it's not easy to keep track of everything. This might even give you a lot of headaches every year when tax time comes around! Unfortunately, if you don't follow through, you could make mistakes that could cost you a lot of money, miss out on tax benefits, or even get fined by the IRS.
So, to help you figure out what works and what doesn’t, we've put together a list of things that you have to avoid in your rental expense deductions when tax time comes.
Doubling Up Your Mileage, Auto Repairs, and Fuel Deductions
We understand that you would like to deduct all your rental business expenses as much as possible but this could be a red flag to the IRS.
However, you have to remember that the money you spend on gas and repairs for your car is already covered by the money you spend on miles. In short, this means that writing off both the mileage and auto repairs and fuel will double up your deductions.
Therefore, we suggest that you write off the costs for fuel and maintenance if you have an official business car. If not, you can keep track of your miles and include them in your rental expense deductions.
Tagging Full Meal Deductions Instead of 50%
We know that in the past, you could deduct 100% from some of your business meal costs BUT this law is only temporary. In 2023, the deduction was already brought back to 50%. This means that if you write off the full cost of something that isn't 100% deductible this year, the IRS will know about it.
You must also take note that most of the costs that rental property owners have to pay for meals fall into the 50% range. Filing this by mistake can lead you to file an amended return and pay penalties.
Combining Bank Accounts
Having different accounts for your rental business and each of your properties can help you easily keep track your rental expense deductions. Mixing them spells trouble, as you can easily forget your transactions, which can affect your bottom line. Aside from that, this will also require your extra time and effort to sort out each transaction.
Deducting Fixed Assets Instead of Repairs
We know that with all the things that you have to manage and think about your rental business, determining which ones to write off as your rental expense deductions can be confusing. But you should take note that fixed assets or capital improvements costs can’t be deducted in the year, unlike repairs and maintenance.
Instead, property owners get their money back over time through the property's depreciation. When you buy a fixed asset, you can only deduct a certain amount of the cost that year.
Underreporting Income
Underreporting is a serious crime in rental expense deduction. So if you have significant understatements, this can lead to IRS penalties with 20 percent of the tax due plus interest.
Skipping Bank Accounts Reconciliations and Reports Reviews
If you don't look over your records and bank reconciliations, you might have trouble with your rental expense deductions since you won't be able to regularly check your rental business trends. At the end of the day, this could cost you more as you can't make smart choices about your rental properties.
Now that you know what to avoid, let’s tackle some of the best practices for rental expense deductions.
Write Down All of Your Rental Income
If you report all of your rental income, you may be able to get more tax breaks for your leased home. Some of these benefits can be big, which is why it's important to report all of your rental property income.
In this way, you can also find out what rental expense deductions you can use for your properties and how they can help you.
Apply for a Property Tax Relief Program
There are several property tax relief programs in your state that let owners use credits before figuring out how much tax they owe. If you’re not that familiar with them, here are the choices that come up most often:
Disabled Person Deduction
Enterprise Zone Investment Deduction
Geothermal, Solar, Wind, or Hydroelectric Deduction
Heritage Barn Deduction
Historical Rehabilitated Property Deduction
Homestead Standard Deduction
Over 65 Deduction and Over 65 Circuit Breaker Credit
Rehabilitated Property Deduction
Supplemental Homestead Deduction
Veteran Deduction
See to it that You Only Deduct the Right Costs
To make more money and get a better return on investment, it would be nice to be able to claim every penny you put into the property. Unfortunately, it doesn't work that way when you have rental homes.
To tell the truth, taking out all of your costs can be a mistake that gets you into trouble.
For you to have a general idea of where to start, here are a few specific categories that you can consider for your rental expense deductions:
Depreciation
If you keep good records, you can keep track of all that depreciation and use it to lower your tax bill.
Mortgage Interest
When you buy your first leased property or try to build your business by adding more properties, you probably already have at least one mortgage. In this case, pay close attention to the interest you pay, since that could also be included in your rental expense deductions.
Operating Expenses
This includes insurance premiums, professional and legal fees, transportation and travel costs, as well as utilities. In fact, there are a lot of them, so they can add up to a lot.
Although this may sound good news for you as a landlord, you should still make sure that any costs you claim are legal. If you don’t, you might be required to make some adjustments on your tax return or pay more taxes.
Property Taxes
It's possible to get big rental expense deductions with this, especially if you own a lot of rental homes or live in a place with high taxes.
Repairs
Taking care of your rental property is a necessary business cost, so you can deduct the money you spend on it. If you want to get the most out of these rental expense deductions, keep all of the bills and records for any repairs you do or maintenance that you have done.
Property Management Fees are Also Deductible
It's hard to manage things on your own, and property management companies can be very helpful for landlords like you.
The good news is that when you work with a property management company like PMI Midwest, our fees are considered "professional services" and can be considered a business expense.
By working with us, we can help you figure out which costs you can claim and which ones you shouldn't.
Need help keeping track of your spending and getting the most out of the rental expense deductions you can claim? You can always visit our Accounting and Reporting page for assistance.
