15 Potential Tax Deductions for Landlords During Tax Season

Any game is hard to win if you don’t know the rules. Being a landlord is no different. Often, juggling tenant needs, paying insurance premiums and mortgages on time, and squaring up at tax season can feel like a chess game where the pieces keep changing.

While the objective is a successful rental business, that’s not always possible––especially these days. According to property company Rich Commercial Realty, landlord operating expenses have continued to rise across the board of rental services, including a 12% increase in the cost of electricity from 2021 to 2022. Given these creeping costs, it’s crucial to do everything you can to help maximize profits and come out triumphant.

One way to keep more of what you earn is to minimize expenses. Most landlords already understand the cost-saving importance of knowing how to set the right rental rate and helping reduce the risk of evictions with thorough tenant background checks through a quality service like SmartMove®.

However, fewer landlords are aware of the range of tax breaks available to property owners and managers—opportunities that could help you save big. With many tenants and landlords recovering after a financially tumultuous few years, it's more important than ever to help protect your investment.

Below, you’ll find 15 potential deductions that could help you during tax season. While some of these tax breaks apply to all homeowners, many are unique to rental properties. Make sure to check with your tax professional or CPA to determine whether any specific tax deduction applies to you and make the most out of your return.

As you work on this year’s tax returns, keep the following deductions in mind:

5. Local Travel

Many landlords like to routinely check in on their tenants and property. You might also need to handle maintenance, repairs, or improvements on-site. According to NOLO, if you use your personal vehicle to make the trip, you may be able to deduct the cost of travel using one of two different methods:

1. Actual expenses or
2. IRS standard mileage rate.

FindLaw.com says there’s a caveat if you’re using the IRS standard method. In order to qualify, a landlord must use this method during the first year that the vehicle was used in rental business activity. The actual expense method allows you to deduct the actual vehicle expenses, as well as depreciation.

According to the IRS, the local travel deduction can include gas, oil, lease payments, licenses and fees, repairs, tolls, and parking. Calculate your deduction both ways to see which method benefits you most.

6. Legal Fees for an Eviction

Often a landlord's worst nightmare, eviction proceedings are extremely stressful and can bankrupt small rental businesses. Thankfully, according to money site SmartAsset, you may usually deduct court fees and attorney costs.

However, even if some of those expenses can be deducted, such a financial hit could decimate your profits. Given that total eviction-related expenses can cost between $1,000 and more than $5,000 depending on a number of factors according SmartAsset how would your business fair with such hefty fees?

In addition to monetary cost, there is also the intense worry of an ongoing legal battle and the pressure of not knowing what could come next. While it’s good to save money through claiming potential landlord tax deductions, it’s better to prevent evictions in the first place by screening your tenants before they're allowed to move in.

Bolster your tenant screening process fast by including:

• Criminal background checks
• Tenant credit reports, including a ResidentScore
• Eviction history reports

Getting an in-depth look at a rental applicant’s background and track record can help you make more informed, timely screening decisions.

7. Home Office

If you use a dedicated space in your home to conduct rental business, it may be a deductible expense–even if it’s not a whole room. However, according to Pathway CPA Group, there are certain criteria your home office must meet in order to deduct the expense, including:

• Your property management activities must qualify as a “trade or business”
• The deductible space must be an area used regularly and exclusively for rental activity

The Balance also reminds you that any equipment must also be used exclusively for business. For instance, your work computer shouldn’t be used to play games or for other personal reasons.

There are several ways you can calculate the business portion of your house as an expense to help find the largest deduction. According to the Balance article linked above, you can:

• Calculate your space’s square footage divided by the square footage of your entire house. If all the rooms in your house are roughly the same size, divide the number of rooms your business space encompassed by the total number of rooms in the house.
• Use a prescribed rate multiplied by the allowable square footage used in the home. As of writing, the prescribed rate is $5 per square foot with a maximum of 300 square feet, according to the IRS.

Note that you can deduct a portion of your home repairs if they partially affect your office and the full price of the repair if it only affects your office. However, you cannot use these deductions if you have an outside office as well, or if you’re renting the space to your employer.

8. Wages for Employees and Independent Contractors

According to real estate site Belong Home, if you hire a property manager or grounds maintenance worker, you can generally deduct their wages as a rental business expense. This also holds true for independent contractors like carpenters or electricians.

According to Nolo, one of the benefits of hiring independent contractors is that you don’t have to withhold federal taxes out of their paycheck or pay one-half of the worker’s Social Security and Medicare taxes. However, you do need to file IRS Form 1099-MISC if you pay them over $600 during the year.

And don’t forget employee meals and entertainment expenses. Turbo Tax reminds landlords that events like holiday parties or summer outings for your staff are 100% deductible. If you incur an expense while doing business with a potential client or business associate, you can deduct 50% of the total.

9. Casualty Losses

If anything happens to your property due to an unexpected event like a natural disaster or fire, you can likely claim a total or partial property loss on your tax return. However, as NOLO points out, you can only claim losses to the extent that they aren’t covered by insurance.

If you do have insurance, you must reduce the amount of your claimed casualty loss by any insurance recovery you receive (or expect to receive, if you haven’t been paid yet). Losses that are fully covered by insurance are not deductible.

10. Depreciation

According to the IRS, depreciation is a deduction you can take for property and items that you own for over one year. The cost of qualifying items are deducted in small amounts over a set number of years. According to Investopedia, rental buildings are typically depreciated over 27.5 years. This means that you can deduct about 1/27 of your rental property annually.

According to financial adviser site Realized, while depreciation is technically voluntary, most property owners would be foolish not to do it. Depreciation claims don’t just possibly save you money, but they might also help keep you out of legal hot water.

Also, if you sell the property for more than the depreciated value, the IRS may charge you a 25% recapture tax, whether or not you actually claimed depreciation. It makes more sense to claim the depreciation than to eventually pay taxes on a benefit you never received.

11. Insurance

According to Steadily, the premiums you pay for almost any insurance on your rental are deductible. This includes fire, theft, and flood insurance for your rental property, plus landlord liability insurance. If you have employees, you can also deduct the cost of their health and workers' compensation insurance.

12. Capital Expenses

Nolo offers some helpful information for understanding how landlords can deduct long-term assets. In terms of tax rules, there are two different types of expenses that are incurred as a rental property business: current and capital.

1. Capital expenses are defined as purchases that are expected to last more than one year and generate revenue in the future. This might include equipment, land, or vehicles, but keep in mind these are not the only capital expenses. Such purchases are treated as investments by the IRS and must be deducted (or capitalized) over a number of years.
2. Current expenses are the day-to-day operational expenses that keep your business running, such as rent and utilities. You can deduct 100% of current expenses from your gross rental income in the year they are incurred.

Help Lower Costs with Strategic Deductions and SmartMove Tenant Background Checks

As a landlord, the complex rules of rental property tax deduction can often work in your favor. However, all your strategic hard work at tax time is meaningless if you sacrifice your profits to debilitating eviction proceedings. Help even the odds with tenant screening through SmartMove.

Created for independent landlords with only occasional screening needs, SmartMove provides fast, online tenant background checks can help you save money by helping you make more confident leasing decisions. And, according to the National Association of Realtors, the fee that you pay for screening might be tax deductible.

While working with finances, details always matter. One of the most important tenant screening tasks a landlord should complete is ensuring applicants make enough income to afford the rent.

An Income Insights report allows you to decide which applicant needs additional income verification by comparing your rental applicant’s self-reported income to actual financial data provided by TransUnion—a major credit agency. Meanwhile, a tenant credit check helps you review your rental applicant’s financial track record and history of paying debts.

When it comes to your livelihood, you need to do your research and use information that can help you make informed choices. With every SmartMove screening package, you even get a proprietary tenant credit score, ResidentScore. This sophisticated analysis helps predict future evictions risks 15% better than a general credit score alone. This is a clear advantage that can give you a leg up when evaluating applicants.

In the game of rental property management, don’t let yourself get blocked into a corner. Increase your chance of success with tenant screening through SmartMove.