Few classes of business owners and managers receive the gold-plated tax treatment that landlords and property managers enjoy. Whether they own a couple of modest rental houses in a quiet town or manage a multi-property portfolio that spans municipal and state boundaries, landlords have a staggering array of tax credits and deductions at their disposal. Since landlords are essentially property owners who also own their own businesses, they're often eligible for tax benefits that cater to business owners and homeowners as well. Read on to learn about five of the most common tax credits for property managers.
1. Depreciation
The often-misunderstood concept of depreciation provides landlords and property managers with a powerful means of spreading the burden of their initial outlays over time. Although the precise rules may change from year to year, depreciation generally permits a given property's owner to deduct a portion of its purchase price from their taxable income over the course of years or decades. The IRS currently allows such deductions on a 27.5 year schedule. Certain states offer additional depreciation benefits as well. Naturally, the total value of a particular depreciation deduction will depend on the purchase price of the property in question.
2. Repairs and Improvements
Rental-property managers are permitted to deduct certain expenses related to the repair and maintenance of their properties. These repairs typically cover defects related to "normal wear-and-tear," but they may also cover the replacement of functionally obsolete fixtures or appliances. Meanwhile, improvements must demonstrably increase the value of the properties on which they're performed. Whereas repair costs are generally deducted from a property manager's income during a specific tax year, improvement costs may be added to his or her depreciation calculations.
In both cases, it may be unfeasible for landlords to deduct labor costs related to such work. For tax purposes, landlords who perform repair and improvement work on their own are never allowed to account for their own labor inputs during the deduction process.
3. Insurance and Losses
Landlords may also receive tax breaks for unplanned repairs that occur as a result of unexpected losses from fires, storms or other uncontrollable events. Although they're rarely generous enough to offer dollar-for-dollar offsets for such losses, these deductions are theoretically designed to protect landlords who lack adequate insurance coverage. In addition to natural events like wind damage and flooding, they may apply to man-made problems like theft, vandalism, arson and more. It's important to note that landlords whose insurance policies cover the full value of such losses may be ineligible for this type of deduction.
4. Employees and Legal Services
Property managers who oversee teams of permanent or temporary employees may be eligible to claim part or all of their ongoing labor costs as a tax deduction. This deduction may also cover landlords who retain independent contractors to perform occasional odd jobs. As such, it's crucial for small-time property managers to keep accurate records of any property-related labor expenses that clear minimum tax reporting thresholds. Related deductions may be available for landlords who retain the services of lawyers, accountants, real estate specialists and other professionals.
5. Travel
Property managers who operate in different districts or cities may be able to deduct a wide variety of work-related travel expenses. Such expenses may include driving mileage, gasoline outlays, airfare, food, hotel stays and more. Most of these travel-related subcategories are subject to specific monetary limits. Landlords and property managers who claim them are almost certain to be subjected to a higher standard of IRS scrutiny and tend to be audited at higher rates than members of the general public.
If you're an aspiring landlord or property manager, you'll be pleased to know that this list contains only the most popular and lucrative rental-property tax credits. With plenty of others that cover smaller and more specific aspects of the trade, it pays to develop a thorough, up-to-date knowledge of the tax code.
