A Landlord's Guide to the Tax Benefits of Owning Rental Properties
Take advantage of the tax benefits of owning rental properties with this helpful guide and tax tips for landlords.
Are you taking advantage of all the tax benefits associated with owning rental properties in North Carolina? Rental real estate provides more tax benefits than almost any other investment. North Carolina landlords who fail to understand and utilize all the available deductions are missing out on the tax benefits of rental homes. Let’s take a look at some of the ways landlords can ease the pain of tax season while growing their wealth with rental properties.
Disclaimer: The following content is for informational purposes only and is not to be thought of as tax advice. If you are seeking tax advice, please make sure to contact a tax professional. For those of you with any questions about Red Door Company’s property management services, please do not hesitate to contact us.
Property Management, Legal and Professional Services
Landlords with North Carolina rental properties who hire a property management company or individual property manager can deduct those fees when they pay taxes. Also, fees paid to attorneys, accountants and other professionals, expenses who provide work related to rental activity, can qualify for deductions as operating expenses. Court filing fees for evictions and tax preparation software costs can also fall into this category.
Rental Property Repairs, Maintenance and Improvements
Repairs to your rental property, which should not be confused with property maintenance and property improvements, are defined as any effort to maintain the current condition of a property or asset. Landlords write off repairs immediately as they would other expenses.
Rental property repairs may include the following: fixing an HVAC unit, completing plumbing repairs, replacing faulty electrical outlets, paying contractor labor costs, etc.
Landlords often confuse property maintenance with repairs. Some examples of rental property maintenance involve: cutting the grass, hiring pest control, cleaning a swimming pool, replacing HVAC filters and cleaning after tenants move out. These tax deductions are deemed maintenance expenses because nothing is actually being fixed.
Home improvements are treated differently that property repairs at tax time. Unlike repairs, which you write off immediately, the costs of improvements that add value to a rental property or extend its life must instead be depreciated over several years. Adding a new roof instead of patching a small leak, replacing old windows with energy efficient windows instead of fixing a broken window pane, and adding a new bathroom instead of adding new sinks to a bathroom are all examples of rental property improvements.
Deducting Insurance Costs Related to Rentals
Insurance premiums that are paid towards your real estate investment business are tax-deductible. Most insurance costs are property-related such as fire, theft and flood insurance. Do not, however, forget to add your PLUP (Personal Liability Umbrella Policy), general liability and mortgage insurance to the list of items which are rental related.
In the unfortunate event that a flood or fire, damages or destroy your rental property, you may be able to deduct some or all of the loss you incur. These casualty loss tax deductions can be tricky because how much you may deduct is dependent on a number of items damaged. Landlords may need to consult with a tax professional in these instances.
Other Tax Benefits of Rental Properties
There are quite a few other tax benefits of owning rental properties in North Carolina and other locations. Here are a few more benefits to keep in mind:
- Advertising and Marketing Expenses
- HOA Fees
- Mortgage Interest
- Office/Operating Expenses
- Commissions Paid to Rental Agents
- Home Office
Understanding Rental Property Depreciation
Rental property depreciation is one of the tax deductions real estate investors receive from the Internal Revenue Service as long as that rental property falls within certain guidelines. According to the IRS, “You recover the cost of income producing property through yearly tax deductions. You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used.”
Depreciation on income producing property can be tricky. While it’s not necessary for landlords to understand depreciation as well as a CPA, a basic understanding is useful when it comes to thinking about and preparing for tax time. It is also useful knowledge for property owners because depreciation reduces your basis, or capital investment in a property, for calculating gain or loss on a later sale or exchange.
Deducting Rental Property Losses
Some North Carolina landlords may also be able to deduct up to $25,000 of rental losses. If your modified adjusted gross income is $100,00 or less, you can take advantage of this rental property tax benefit. Landlords may also be able to carry additional losses above the $25,000 forward to the following years. Make sure to read what the IRS says about this tax benefit associated with owning rental properties and discuss it further with a tax professional.
As you can see, landlords who own rental homes in North Carolina can take advantage of many deductions to offset the income generated by their cash flow rental properties. To make the most of the tax benefits that come with owning rental properties, we recommend adding a CPA with a sound understanding of real estate investing to your rental support team.