What Expenses Can a Phoenix Landlord Claim on Taxes?
As tax time rolls around, it is time to review your deductions and credits. When you invest in a Phoenix rental property, you can enjoy a range of different tax mitigation strategies. Unfortunately, there are also tax consequences that you will have to pay at the end of the year as well.
At Service Star Realty, we are not tax professionals or accountants. We are just discussing taxes based on our experience. If you have specific questions and concerns, you should talk to your accountant and get professional help.
What Tax Deductions Should You Use?
Depending on your unique situation, there are a number of deductible expenses that you can use to lower your overall tax bill. During the year, you should make sure to track all of your receipts so that you can accurately calculate your deductions. You should also talk to your tax accountant about any changes that might affect your financial portfolio.
- Interest: While principal payments are not deductible, your interest payments should be. Mortgage origination costs, commissions and appraisals are not deductible. You can see your deductible costs on Form 1098. Your mortgage company should send this form to you each year. Then, you can report it on Schedule E.
- Taxes: Some of the taxes you pay during the year might be deductible, so check with your tax attorney.
- Insurance: If you use insurance for your rental activities, there is an excellent chance that you can deduct them. For example, you can most likely deduct theft, fire, flood and landlord liability insurance. If you have to hire employees, you can deduct their workers' compensation and health insurance.
- Management fees: Your management fees can be deducted from your taxes.
- HOA fees: The fees you pay to your HOA may also count as a deduction.
- Advertising costs: Advertising costs are deductible expenses.
- Depreciation: You cannot deduct the cost of your rental during the year you buy it. Instead, you can deduct some of the property's cost over several years through depreciation.
- Repairs: Your repair costs might be deductible. This includes repairs for activities like plastering walls, replacing a broken window, repainting the home and fixing leaks. These costs are fully deductible during the year you perform them.
- Travel: Property owners can deduct the driving and travel costs they incur for visiting their rental building. If you have to drive to the building to deal with an issue, you can deduct these costs. You are not allowed to deduct this cost if you were driving to make property improvements. Instead, these travel costs must be depreciated and included in your property's tax basis.
- Personal property: If your personal property is used for your rental, you can use a safe harbor deduction as long as the property costs $2,000 or less. You can also use a bonus depreciation worth 100 percent between 2018 and 2022. Personal property may involve things you use in the rental like lawnmowers, furniture and appliances.
- Pass-through tax deductions: The Tax Cuts and Jobs Act created a pass-through deduction for landlords. Depending on your income, you may be able to deduct 20 percent of your net rental income. The other option is to deduct 2.5 percent of your initial rental property's costs as well as 25 percent of the amount you pay your employees.
- Independent contractors and employees: If you hire someone to perform services at your rental property, you can deduct their wages as a business expense. This is true for independent contractors and employees.
- Home office: You are allowed to deduct some of the costs related to your home office expenses. The Internal Revenue Service (IRS) is very specific about what can and cannot be deducted, so it is important to talk to your tax accountant first.
- Legal and professional services: If you have to hire a lawyer, tax accountant, property manager or another professional, you can deduct the cost from your taxes.
Can I write off Renovations?
Did you make renovations last year? In that case, you need to review the difference between repairs and upgrades before you file your taxes. Repairs are incurred to keep your rental property in shape. They can be deducted from the property's taxable income. Improvements cannot be deducted immediately. Instead, upgrades and improvements are counted as capital expenses and depreciated over multiple years.
If you are upgrading an item or adding something new, it is probably an improvement. For example, kitchen upgrades and roof replacements are generally counted as upgrades. Repairs are generally cheaper, and they are intended to get the property back to working order. In property rentals, you may perform repairs like fixing a leaky faucet or cleaning out the gutters.
How does depreciation help?
As a property owner, you can enjoy having the tax benefits of depreciation. Through depreciation, you can write off a portion of something's value as it grows older. The IRS allows you to depreciate residential properties over 27.5 years. It is also possible to depreciate cabinets, appliances and similar items on a faster schedule because they have a shorter life expectancy.
Does Capital Gains Tax apply to rental properties?
While residential homes are partially excluded from capital gains taxes, rental properties are not. If you sell your property after owning it for at least a year, you are required to pay capital gains tax. To defer those taxes, you can use a 1031 Exchange. This exchange occurs when you sell one property and immediately use the proceeds to purchase another property.
Do I have to pay sales tax?
As a Phoenix property owner, you must register your property in your county. Then, the county taxes the rental at a higher rate because it is a rental. Additionally, Phoenix property owners must pay a Transaction Privilege Tax (TPT) to the city. To do this, you must apply for a TPT tax license, file your tax return for the month and turn in your payment.
Do you need help? Phoenix property owners can talk to their tax attorneys about the deductions that work best for their situation. You can also call Service Star Realty - (480)426-9696 if you have any questions about the management of your investment property, we'd love to help.
Other blogs you might be interested in:
How to Evaluate Your Phoenix Real Estate Investment's Performance
Do Phoenix Property Owners Need to Renovate to Successfully Rent Their Homes?
What are the Risks of Holding Out for a Higher Rent?
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