Yes! You are permitted to make a tax deduction for the entire landlord insurance premium for your rental property. The IRS considers this a normal business expense when renting out real estate.
Some people own real estate in their own name and manage it personally, then claim the expense on their personal tax returns. Others choose to hold property in an LLC as a business entity. Either way, all insurance premiums associated with the rental property are tax deductible.
Umbrella insurance policies that offer extra liability insurance are also a deductible expense along with mortgage insurance and flood insurance.
You can even deduct a proportional amount of the homeowners insurance for your primary residence if you have tenants. The amount you can deduct will be proportional to the overall square footage of your home.
Running a rental business comes with its fair share of headaches, but one of the upsides is that just about every rental activity associated with buying, maintaining, and operating a rental property is tax deductible. We’ll walk through a checklist so you remember to keep track of your actual expenses and get the maximum tax benefit.
At the end of the day, the logic is that you should only have to pay tax on your profits, which is your rental income minus all of your expenses. That’s the number that will be entered on Schedule E when you file your taxes.
Mortgage interest and other loans
The IRS understands that landlords often need to borrow money not just to buy the rental real estate in the first place, but to build it, repair it, buy equipment, etc.
Any interest that accrues on a mortgage or loan that’s associated with your rental property is deductible expense. That includes interest on credit cards and home equity loans (HELOC).
Property taxes are often high, but you’ll get a break on your personal income tax return because property tax on rental properties is a deductible expense.
Both state and local government property taxes are deductible as well as miscellaneous fees. For example, some cities have started charging a “hospitality tax” or “occupancy tax” on homeowners who rent out their properties on AirBnB or VRBO. Those short-term rental taxes are certainly deductible.
Normally, when you have a business expense it is deductible in the same year you spent the money. However, when you spend money on something that’s expected to last several years, the IRS won’t let you claim all of that expense in one year. Instead, you’re required to follow a “depreciation schedule” that will tell you what percentage of the expense you can claim every year.
The full schedule is written down in IRS Publication 946 and 527, but we’ve pulled out the categories that are relevant for landlords and what the useful life period is (how long it takes to fully depreciate):
- Appliances, carpet, and furniture: 5 years
- Cars, trucks, and construction equipment: 5 years
- Computers: 5 years
- Office furniture and equipment: 7 years
- Roads, shrubbery, and fences: 15 years
- Buildings, furnaces, and roofs: 27.5 years
Landlords would prefer that depreciation didn’t exist — it would be nice to be able to spend $20K on a new roof and have the whole thing be tax deductible right away. But, at least now you won’t be surprised when your accountant tells you that you can’t deduct all of that expense in the first year.
Since we just talked about spreading out cost depreciation on long-lived assets over several years, you might be wondering: “What about repairs?” Yes, they’re always tax deductible, but whether or not they are subject to depreciation rules depends on the “improvement” standard.
If you were repairing something to get it back to rentable condition, but did not add significant value to your real estate, then there’s no need to worry about depreciation. For example, painting the interior, doing basic landscaping, or replacing an old toilet are not improvements.
However, if you gut-rehabbed several rooms to increase the value of the property, you’re now in “improvement” territory and your accountant will need to split hairs to figure out what needs to be depreciated.
Cleaning and Maintenance
This category of operating expenses mostly consists of employee and contractor wages, which are fully deductible. Naturally, all the products and materials you purchase to do the cleaning and maintenance costs are also deductible.
Utilities are not deductible if your tenants reimburse you. For example, it’s fairly common for landlords to keep some of the utilities in their name but pass through the cost to the tenants. You can only claim a deduction for the actual expenses you incurred, meaning the total amount you paid minus the amount the tenant paid you back.
Any other utilities or services that you pay for and don’t charge tenants for, like trash collection, are deductible.
If you’ve outsourced property management of your properties, their fees and anything they spend on your behalf is tax deductible. Even if they’re not a full time professional manager, if you pay someone to help out, keep track of that business expense and deduct it.
Legal & Professional Fees
Paying for tax professionals, legal fees for contract review, and memberships in professional organizations are deductible as long as they are used for a legitimate business purpose.
The posting fees for Craigslist and Zillow, plus any banner or sign printing you might do are deductible.
Commissions and Referrals
Any referrals fees for finding tenants, even commissions paid to current tenants, are a business expense that should be deducted.
Travel and Transportation
We saved this one for the end because travel expenses can get tricky. The IRS is suspicious of travel expenses because historically a lot of people have abused this deduction by trying to get a deducation for personal expenses.
As of 2020, the IRS allows you to choose one of two ways of calculating your deduction for driving:
- 58 cents per mile standard mileage rate
- Actual expenses (itemized)
What that means is that if you want to maximize your deductions, you’ll need to keep track of both how far you drove and what your actual expenses were and then claim the greater of the two.
If you have to travel a long distance to visit your property, you can also deduct meals, taxis, airfare, and hotels.
Just like with travel expenses, the IRS scrutinizes office expenses more carefully if someone takes a home office deduction. For example, what people used to do was claim a $1,000/month deduction for using a room in their house as an office.
So, if you’re planning to take a home off deduction:
- Save your receipts
- Make a fair assessment of how much of your use of the home office is legitimate business use
- Be prepared to justify your decisions on the IRS form
On the other hand, if you’re renting an office somewhere outside your home, that’s a very straightforward deduction.