Write Offs for Landlords
Now, what does this have to do with being a landlord…well, not much, but it’s the only lead in I could come up with when discussing rental property write offs…..
As a landlord, it’s important to know what write offs are and how they work. They are instrumental in whether or not you’re paying taxes on income you shouldn’t. Many new landlords aren’t aware of what counts as a deduction and as a result, end up paying more than their fair share to the tax man….
Generally, deductible costs are broken into three categories:
• Start up
Start Up Costs
When you start a business, there’s a bunch of stuff you’ll be spending money on that aren’t really part of your day to day operations, these are startup cost. Things like market research, attorney and/or (my favorite) accounting fees, licenses, advertising, these types of things. One thing to note, the feds limit the amount that can be expensed in the first year. They cap it at $5,000 and anything above that gets amortized over 15 years. I may do a more detailed explanation as its own standalone thing…we’ll see…
Next, “Operating costs” are the expenses you incur day to day. Utilities, repairs, mortgage interest, real estate taxes, supplies, etc. These are the actual costs of running the business….These do not include the building and improvements that increase the value of the property and/or have a useful life longer than a year….those types of costs are capital expenses….repairs bring the asset into working order or keep it so, things like painting, fixing a gutter or replacing a broken window…installing new windows in a place you’re going rent, well, that falls into our next section…
Capital expenses, as mentioned above, are purchases with a useful life going out past a year. They’re things like the building itself, the land it’s on, equipment, improvements and furnishings. Generally speaking, we can’t just right off 100% of the cost. Instead, we take a piece of the expense each year over the life of the particular item. Depreciation is a topic of another article but as an example, a residential rental purchased for $45,000 does not show up on your tax return as a $45,000 expense. Instead, a portion of that amount is show over its life, in this instance, 27.5 years….
Please note, this is an overview and there are nuances that need to be considered and there are a lot of things we couldn’t get to, like safe harbor rules for improvements and other super cool things but dry your tears, we are just a phone call away…if you have further questions, give me a shout and we can dig in….
If there’s a topic you’d like us to make into an article or video, let me know….
Thanks for joining me today….