Introduction

1. Tax Deduction Basics for Landlords

• How Landlords Are Taxed
• What is Rental Income?
• How Income Tax Deductions Work
• How Property Ownership Affects Taxes

2. Landlord Tax Classifications

• The Landlord Tax Categories
• Business Owner Versus Investor
• Are You Profit Motivated?

3. Deducting Your Operating Expenses

• Requirements for Deducting Operating Expenses
• Operating Expenses That Are Not Deductible

4. Repairs

• IRS Rules: Repair Versus Improvement
• How to Deduct Repairs and Maintenance

5. Depreciation Basics

• Depreciation: The Landlord’s Best Tax Break
• Understanding the Basics
• How to Depreciate Buildings
• Depreciating Land Improvements
• Depreciating Personal Property
• When You Sell Your Property
• Tax Reporting and Record Keeping for Depreciation

6. Maximizing Your Depreciation Deductions

• Determining the Value of Your Land and Buildings
• Cost Segregation

7. The Pass-Through Tax Deduction

• Your Rental Activity Must Be a Business
• You Must Have a Pass-Through Business
• You Must Have Qualified Business Income
• You Must Have Taxable Income
• Calculating Your Pass-Through Deduction
• Landlords Who Own Multiple Properties
• Strategies to Maximize the Pass-Through Deduction
• Landlord Business Safe Harbor Rule

8. Interest

• Interest Landlords Can (and Can’t) Deduct
• Mortgage Interest
• Other Interest Expenses
• Points and Prepaid Interest
• Interest on Construction Loans
• Loans With Low or No Interest
• Loans on Rental Property Used for Non-rental Purposes
• Limitation on Interest Deductions by Landlords Earning $26 Million or More

9. Start-Up Expenses

• What Are Start-Up Expenses?
• Determining Your Business Start Date
• How to Deduct Start-Up Expenses
• If Your Business Doesn’t Last 15 Years
• If Your Business Never Begins

10. The Home Office Deduction

• Qualifying for the Home Office Deduction
• Calculating the Home Office Deduction
• Simplified Home Office Deduction Method
• IRS Reporting Requirements
• Deducting an Outside Office

11. Car and Local Transportation Expenses

• Deductible Local Transportation Expenses
• The Standard Mileage Rate
• The Actual Expense Method
• Other Local Transportation Expenses
• Reporting Transportation Expenses on Your Tax Return

12. Travel Expenses

• What Are Travel Expenses?
• Deductible Travel Expenses
• How Much You Can Deduct

13. Hiring Help

• Deducting Payments to Workers
• Employees Versus Independent Contractors
• Tax Rules When Hiring Independent Contractors
• Tax Rules for Employees
• Hiring Your Family
• Hiring a Resident Manager

14. Casualty and Theft Losses

• What Is a Casualty?
• Calculating a Casualty Loss Deduction
• Disaster Area Losses
• Repair and Replacement Costs of Casualty Losses
• Tax Reporting and Record Keeping for Casualty Losses

15. Additional Deductions

• Dues and Subscriptions
• Education Expenses
• Gifts
• Insurance for Your Rental Activity
• Legal and Professional Services
• Meals and Entertainment
• Taxes
• Unpaid Rent

16. Deducting Rental Losses

• What Are Rental Losses?
• Overview of the Passive Loss Rules
• The $25,000 Offset
• The Real Estate Professional Exemption
• Deducting Suspended Passive Losses
• Tax Reporting for Passive Rental Losses
• Strategies for Dealing With the Passive Loss Rules
• Annual Loss Limits
• At-Risk Rules
• How to Deduct Rental Losses

17. Record Keeping and Accounting

• What Records Do You Need?
• A Simple Record-Keeping System
• Accounting Methods
• Tax Years

18. All About Schedule E

• Who Must File Schedule E?
• Filling Out Schedule E

19. The Net Investment Income Tax

• How the NIIT Works
• Real Estate Professional Exemption From the NIIT
• Planning to Avoid the NIIT

Index

Introduction

This is a book about income tax deductions for landlords—that is, people who own residential rental property. If you are one of the millions of Americans who owns a small number of residential rental units (one to ten), this book is for you. And even landlords who own dozens of residential rental properties will find lots of useful information in this book that can help them save money.

No landlord would pay more than necessary for utilities or other operating expenses for a rental property. But, every year millions of landlords pay more taxes on their rental income than they have to. Why? Because they fail to take advantage of all the tax deductions available to owners of residential rental property. That’s where this book comes in. It gives you all the information you need to maximize your deductions—and avoid common deduction mistakes. You can (and should) use this book all year long, to make April 15 as painless as possible.

When it comes to understanding your taxes, you need guidance more than ever. In 2017, Congress enacted the most sweeping changes to the tax code in over 30 years when it passed the Tax Cuts and Jobs Act (TCJA), which took effect in 2018. Now, in an effort to stave off economic devastation in the wake of the coronavirus (COVID-19) pandemic, Congress has revised the nation’s tax laws yet again, temporarily suspending many of the harshest provisions of the TCJA. We explain how these changes affect landlords. Of special interest are new rules for deducting losses during 2018 through 2020 (see Chapter 16).

Even if you work with an accountant or another tax professional, you need the information in this book. It will help you provide your tax professional with better records, ask better questions, obtain better advice, and, just as importantly, evaluate the advice you get from tax professionals, websites, and other sources.

If you do your taxes yourself (as more and more landlords are doing, especially with the help of tax preparation software), your need for knowledge is even greater. Not even the most sophisticated tax software can decide which tax deductions you should take or tell you whether you’ve overlooked a valuable deduction. This book provides do-it-yourselfers with the practical advice and information they need to take full advantage of the many deductions available to landlords.

This book is written for traditional landlords who rent out their property full time to long-term tenants. If you rent your property to short-term guests through Airbnb, VRBO, or any other short-term rental platform and want tax guidance, see Every Airbnb Host’s Tax Guide by Stephen Fishman.

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