If you recently became a landlord with your first rental property, chances are you have questions regarding handling rental-related taxes. Although you should always check with a qualified tax pro during your first year as a landlord, there are some tax basics you should become familiar with.
Most of the tax deductions are related to the normal operation of a rental. Here are some of the deductible items:
- Repairs: The costs of repairs can only be deducted if they were performed to restore the property to its original condition. Some examples would be replacing locks, repairing leaky pipes, fixing broken windows or window locks.
- Home office: This one can get complicated, as the IRS has a strict definition of “home office.” What this means is you’ll be able to take the deduction only if you have a dedicated space in your home for regular and exclusive home office use. In other words, if you take your laptop into the bedroom to balance receipts, bill vendors and conduct other rental-related business, you cannot take the home office deduction for your bedroom.
- Mileage: The IRS offers landlords the opportunity to either deduct specific expenses (cost of gas, car maintenance) related to driving to and from the property or to property-related legal disputes, or taking the standard mileage deduction that’s offered each year.
- Depreciation: This can catch you off guard, especially if this is your first year as a landlord. You can deduct the cost of repairs. At the same time, you can’t deduct the cost of any improvements made to the property. According to the IRS, a repair is considered an improvement when it adds value to the property, rather than restoring it to its original condition. In this case, the costs must be deducted slowly over a period of years, also known as depreciating those costs. If you are fortunate enough to sell the property for more than its present value, you will need to “recapture” some of the depreciation you deducted earlier. This might lead to a higher tax bill in some cases, depending on your overall financial picture for the year.
While becoming a landlord for the first time can be rewarding, there are tax issues involved that could throw you for a loop if you’re unprepared. Always consult with a tax pro at some point during the tax year to make sure you’re on the right track. Keep organized records and receipts for any rental-related expenses, including court costs in case you needed to evict a tenant.
By keeping careful records and checking in with a tax pro, you’ll get your role as a landlord off to a solid start for the present year and for years to come.