Tax Law for Landlords for 2022
Renters Warehouse Blog
A new year is a time for new beginnings. It also means an end to your income for 2021, and time to think about getting your finances in order so that you can file that tax return in April.
As a landlord, tax time can be overwhelming and tremendously complex. There’s a lot to do, plenty of papers to find, and often, new changes to the tax law to navigate. But it doesn’t need to be stressful. There’s a lot that you can do to make this season a lot more manageable. Understanding tax law can help you to understand what deductions you’re eligible for, what mistakes you’ll want to avoid, and can even help you to plan ahead so that you can save more next year.
Being informed can make a world of difference –both to your peace of mind, and to the amount of tax that you end up owing. With this in mind, let’s dive into a few things you should know about filing taxes as a landlord in 2022.
Calculate Your Rental Income
You know that you owe taxes on your rental income –but what exactly is considered rental income? According to the IRS, rental income is, “Any payment you receive for the use or occupation of property.” This includes everything from rent payments, security deposits that are kept, as well as services that are given in place of money for rent. It is important that you claim any and all income that is connected to your rental property.
- Rent Payments
First up, we have your standard monthly rent payments. Most landlord know that these are considered income. This includes checks, bank transfers, and cash.
- Services That Are Traded for Money
For agreements where the tenant works off part of their rent, that amount is still considered income.
- Expenses That Were Paid by Tenants
If a tenant is not required to pay for certain services but pays them as part of their rent, that’s considered taxable income as well.
- Security Deposits That You Keep
Security deposits are not taxable however any portion of the security deposit that you keep must be included as rental income. This means if you keep part of the security deposit because the tenant causes damage to the property, that amount would be included as income for the year.
Landlord Deductions: Which Ones Are Available for Landlords to Take?
Once you have your rental income calculated, you’ll want to see if there are any deductions that you are eligible for.
The IRS is pretty generous when it comes to available deductions for landlords, and there are a number of different ways that you can potentially reduce the amount of tax that you owe.
Here are some of the more common deductions now:
- Mortgage Interest – As a landlord, mortgage interest is deductible. This is often one of the main deductions as mortgage interest can add up significantly over the course of a year. Of course, if you own your property free and clear, then this is one that you don’t qualify for!
- Maintenance and Repairs – Repairs that were done on your rental throughout the year are also deductible. This includes materials and labor if you ended up hiring someone to do the tasks for you. Maintenance is fully deductible as well. This includes lawn care, snow removal, tree pruning, and more.
- Improvements – Improvements, on the other hand, are things that add to the value of your property, and these must be treated differently on your tax return. Improvements include things such as additions, landscaping, a new roof, a security system, and new flooring. Improvements can be deducted as well, but not all at once. They must be recaptured over a number of years. See IRS Publication 527 to learn more.
- Utilities – In most cases, tenants are responsible for utilities. But if you happen to pay them, then they are deductible. This includes fuel, electric, water and sewer, trash, and recycling.
- Advertising Costs – Any advertising expenses can be deducted as well. This includes costs for newspaper ads, online listing fees, or yard signs.
- Rental-Related Travel – If you spend time traveling to your rental for maintenance or other jobs, your expenses could be deductible. You can either deduct the actual cost of travel or use the standard mileage rate for the year. For 2021, this was 56 cents per mile. For 2022, the standard mileage rate will be 58.5 cents per mile. If you’re a long-distance landlord, you can deduct airfare, hotel costs, and 50% of meal expenses. Just keep in mind that IRS auditors closely inspect all deductions for overnight travel, so you’ll want to keep all of your receipts pertaining to the work that was done on the rental if you end up claiming this deduction.
- Legal and Professional Fees – Legal and professional fees pertaining to your rental property are also deductible. This includes property manager and attorney costs. Of course, it also includes the cost of hiring an accountant to do your tax return for you!
- Insurance – Property insurance premiums are also deductible. This includes most policies that you might purchase for the rental, including fire, theft, and liability. And if you operate as a business, then you can deduct your employee’s health insurance and workers’ compensation as well.
- Taxes – You can deduct taxes on your tax return? Yes! Some landlords don’t know this, but property taxes can usually be deducted as well. There is a limit on this deduction, however. State and local tax deductions cap out at $10,000, or $5,000 if you’re married filing separately.
- Depreciation – Depreciation is another important deduction. More on that below.
- The Pass-Through Deduction – The pass-through deduction came through the Tax Cuts and Jobs Act of 2017, and is another valuable deduction that landlords can take. More on that below.
Want more deductions? See: Top-Ten Deductions for Landlords to see other deductions that landlords may be eligible for.
What is Depreciation and How Does It Work?
Depreciation is one of the biggest deductions for most landlords. However, it’s a point of confusion for many as well. Here’s how it works: the IRS considers your rental to be depreciating in value, and states that you can cover the cost of this loss by claiming depreciation on your tax return each year. In most cases, residential rentals are depreciated over a 27.5-year period.
This is a valuable deduction; however there is a downside to it. The depreciation that you claim must be recaptured if you sell the property. This means that you’re essentially just deferring this expense until a later date. Still, it’s not optional. The IRS requires landlords to take this deduction and it can make a big difference on the amount of tax that you owe.
The Tax Cuts and Jobs Act - Understanding the Pass-Through Deduction
Since the Tax Cuts and Jobs Act was passed in 2017, many landlords qualify for a pass-through deduction. This means they will be able to deduct up to 20% of their rental income, 2.5% of the cost of their rental property, and 25% of what they pay employees (if they have them). The only caveat is that the rental activity must qualify as a business. Not sure if your rental activity qualifies as a business? The IRS adopted a special “safe harbor” rule, stating that a rental is automatically considered to be a business for this pass-through deduction as long as:
- You keep separate books that show income and expenses for each rental real estate enterprise that you own
- You perform 250 hours of real estate services each year, and
- You keep records documenting those real estate services (IRS Notice 2019-7) Learn more here.
Services pertaining to real estate includes the following:
- Advertising to rent the property
- Lease negotiation and signing
- Verifying information in tenant applications
- Rent collection
- Daily operations, including maintenance and repair of the property
- Managing the rental property
- Purchasing materials
- Supervising employees or contractors
Note that this deduction is scheduled to end on January 1, 2026.
Curious about the Tax Cuts and Jobs Act and how it impacts landlords? Be sure to download your FREE guide here. See the new rules for 1031 exchanges, increases to the earned income tax credit, and more.
Tips to Make Tax Time Easier
Now, here’s a look at a few tips to make tax time easier when it rolls around each year.
- Keep Good Records
Record keeping isn’t the most fun thing in the world, but it is an important part of being a landlord. Especially when it comes to tax season, keeping good records will allow you to identify receipts, keep track of eligible expenses, make it easier to file, and help to support items that you’ve claimed as deductions on your tax return. Additionally, while we all hope that it never happens, should you end up getting audited by the IRS, being organized will help you to provide proof of your deductions. If you can’t provide proof, you could be subject to additional taxes and penalties as well.
- Consider Employing Tax Strategies
It may be too late for last year, but it’s not too late for this one. There are a number of tax strategies that you can employ that will impact the amount that you owe in tax. This includes things like deferring part of your income –if this is an option for you, making a charitable contribution –as this will give you a tax write-off, and making sure you have enough deductions. Another idea is to contribute the maximum amount to tax-deferred retirement accounts, which can reduce the amount of taxable income that you have.
- Hire an Accountant
Finally, if you’re finding that the stress of tax season is starting to become too much, then you’ll want to consider hiring an accountant. A good accountant will free up your time and save you from a world of stress and hassle. Not to mention, they can make you aware of changes to the tax law, and advise you on strategies that you can employ that can help you to save on the amount of tax that you owe.
Tax laws for landlords or real estate investors are different than tax laws for those with personal property. Understanding the differences and knowing the deductions that apply to those with investment properties is important. If you are unsure of something, it is important to talk with a good tax consultant or accountant. While there might not be much you can do to change the previous year’s taxes, the start of a new year means you can start fresh –and start employing tax strategies that can help you to save when tax season comes around next year.
Note: This article is intended to inform and to guide. It is not meant to serve in place of tax advice from a licensed tax professional or attorney. Please consult a tax professional for information about your tax situation and deductions that you’re eligible for.
Are you looking for more tips for navigating tax season? Take a look at: Filing Taxes When You’re a Landlord.
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