Property Tax Deductions
Is it ever too early to start thinking about your taxes? We don’t think so, particularly when it comes to tax deductions. Homeowners and landlords can benefit from a number of property tax deductions every year. Read on for a brief overview of these potential deductions for the upcoming tax season.
For the 2019 tax season, there’s a new limit: You may deduct up to $10,000 ($5,000 if married filing separately) for a combination of property taxes and either state and local income taxes or sales taxes.
You might be able to deduct property and real estate taxes you pay on your:
- Primary home
- Co-op apartment (see IRS publication 530 for special rules)
- Vacation homes
- Property outside the United States
- Cars, RVs and other vehicles
What’s not deductible
The IRS doesn’t allow property tax deductions for:
- Property taxes on property you don’t own
- Property taxes you haven’t paid yet
- Assessments for building streets, sidewalks, or water and sewer systems in your neighborhood. (Assessments or taxes for maintenance or repair of those things are deductible, though.)
- The portion of your tax bill that’s actually for services — water or trash, for example
- Transfer taxes on the sale of house
- Homeowners association assessments
- Payments on loans that finance energy-saving home improvements. (The interest portion of your payment might be deductible as home mortgage interest, though.)
- More than $10,000 ($5,000 if married filing separately) for a combination of property taxes and either state and local income taxes or sales taxes.
How to get a bigger property tax deduction
- Prepay your property taxes. If your semiannual tax bill is due next April but you pay it early — say, this December — you can deduct it this year instead of next year.
- Save your registration statements. When it’s time to renew your registration on a vehicle, check if any part of the fee is actually property tax. There could be a tax deduction hiding in there.
- Scrutinize your closing paperwork. If you bought or sold a house, go back and look at what you paid at closing for property taxes. It’s easy to overlook, says Richard Smith, an enrolled agent in San Jose, California. Plus, after the tax assessor has a chance to revalue the property, you might get a second tax bill, he adds.
Tax Deduction for Landlords
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. Starting in 2018, the Tax Cuts and Jobs Act limited the interest deduction for landlords who earn more than $25 million from their rentals. However, such landlords can avoid this limit by agreeing to depreciate their rental property over 30 years instead of 27.5 years.
Click the link to find more detailed information about deducting interests on rental property.
2. Depreciation for Rental Real Property
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.
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.
Read Tips for Maximizing Repair Deductions to ensure your expense will constitute a repair, not an improvement.
4. Personal Property
The cost of personal property used in a rental activity can usually be deducted in one year using the de minimis safe harbor deduction (for property costing up to $2,000) or 100% bonus depreciation which will remain in effect for 2018 through 2022. Such personal property includes appliances or furniture in rental units and gardening equipment. For details, see Every Landlord’s Tax Deduction Guide, by Stephen Fishman (Nolo).
5. Pass-Through Tax Deduction
Starting in 2018, most landlords will qualify for a new pass-through tax deduction established by the Tax Cuts and Jobs Act. This deduction is a special income tax deduction, not a rental deduction. Depending on their income, landlords may be able to deduct (1) up to 20% of their net rental income, or (2) 2.5% of the initial cost of their rental property plus 25% of the amount they pay their employees. This deduction is scheduled to expire after 2025. For details, see Every Landlord’s Tax Deduction Guide, by Stephen Fishman (Nolo).
Landlords are entitled to a tax deduction for most of the driving they do 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. However, you can’t deduct the cost of travel you do to improve your rental property–these expenses must be added to the property’s tax basis and depreciated over many years.
If you drive a car, an SUV, a van, a pickup, or a 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 (check the IRS website for current rates).
To qualify for the standard mileage rate, you must use it in the first year you use a car for your rental activity.
Learn more about deducting landlord car expenses.
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.
7. 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 or Every Landlord’s Tax Deduction Guide, both by Stephen Fishman (Nolo).
8. 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). Find out tax rules that apply to landlords who hire independent contractors to help them with their rental business, see Hiring Independent Contractors for Your Rental Activity.
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.