Tax Deductible Rental Property Expenses, Part 4: Landscaping, Hired Help, HOA Fees

In order for your rental property to be attractive to prospective renters, it should be found in good and presentable order. These expenses can be deducted against the income received from this property provided they meet the business use requirements. Let’s look at landscaping, hired help, and HOA fees.

For more information, please review IRS Publication 527 for current regulations.

Landscaping

The seasonal maintenance of the property such as grass trimming, floral arrangements, and other weather related tasks can be applied to the rental income for the property. In some of these services you may be required to pay for the cost of the plants, shrubs, etc. Most of these types of services are performed similar to your main home landscaping, however these costs are limited to only the portion of time in which the property is not personally used.

Hired Help

This type of cost is usually for such services as property security review, greeting new renters, and even a concierge type of service such as a tour guide for the local area. This service should be set forth in an agreement between yourself and the parties involved, and can be expensed against the revenue of the property during allowed rental days. Please note that these services should not be used in return for rental use otherwise it would be classified as personal use days since you had a material benefit from this. It is important to note that these payments may need to be reported under a 1099 if they exceed the $600 threshold. Because of this when using hired help, it is usually best to use a service organization which would handle some of these requirements.

HOA (Home Owners Association)

Since these types of dues assessments are usually periodic, they can be used to offset the income from the rental property. Many of these associations perform services use as property maintenance, administration services, etc. It is important to note that these services along with others related to them can only be deducted if they are not personally used. Also note that some services which are offered by these HOA’s should not be duplicated in other areas such as landscaping and hired help. Using an HOA can be a benefit since most of the services needed to maintain and run your property can be managed by them as a bundled service assessment fee.


Redmond CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

Tax Deductible Rental Loss

One thing we learned about investing in real estate over the last few years is that it can be quite volatile at times and requires sufficient capital and planning to be successful. Rental properties are traditionally long term investments and losses may occur during the holding period. Investors should make an effort to become familiar with the issues related to the deductibility of such losses.

IRS passive loss rules dictate that passive losses from real estate can only be offset by passive income and can only be carried forward not back. Generally, losses from real estate rental activities are considered passive losses unless you are a real estate professional. Even if you actively or materially participate in the management of the rental property any resulting losses would still be passive losses if you are not a real estate professional. Active participation and material participation are not the same. Active participation is a less stringent standard and requires that you be involved in significant and bonafide management decisions including tenant approval, rental terms and expenditures. To meet the material participation standard your management efforts must be on a substantial, continuous and regular basis and meet additional IRS requirements beginning with a minimum of 500 hours spent on rental activities.

There are exceptions to this rule. If you own at least 10% of a rental property and actively participate in its management then you may be able to deduct up to $25,000 of passive losses even if you don’t have any passive income. Under this rule you can offset passive income from the rental property with your non-passive income such as wages, interest and dividends etc. Since this is intended to be a break for smaller landlords the deduction amount gets reduced after your modified AGI exceeds $100,000. You lose $1 of offset for every $2 over MAGI which reduces the offset to $0 when MAGI reaches $150,000. See Passive Loss Rules for Rental Property.

Real estate professionals are able to treat losses as non-passive and offset other income if they materially participate in the real estate management activities. This requirement applies to each rental property individually so some properties owned by a real estate professional could qualify while others do not. To be considered a real estate professional you would need to spend more than 50 percent of your time and more than 750 hours annually on real estate activities. This standard must be met every year so one year you may qualify as a real estate professional and the next you don’t. See Professional Real Estate Rules for Rental Property.

Passive losses that cannot be offset because of a lack of passive income and don’t meet other deductibility requirements become deferred or “suspended” and are carried forward indefinitely until passive income becomes available or the entire rental property investment is sold.

Given the complexity of the rules regarding real estate rental properties and the usual long term holding periods you must maintain good records over the life of the investment and possibly long after it is sold if carry-forwards are involved. Obviously, this can get pretty onerous when you have multiple properties and your own personal involvement in each one can change from year to year which changes the tax treatment. Aside from purchase cost information you need to keep receipts for all expenses related to your properties and keep track of rents received. Depreciation schedules should be kept for the property structures and any capital improvements. Be sure and keep a logbook to document your time spent on rental property to show active or material participation or that you are a real estate professional.


Redmond CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

Tax Deductible Rental Property Expenses, Part 3: Supplies, Taxes, Utilities

As a Landlord, you may incur certain expenses during the course of business that have some significant impact on your profitability. Among these are supplies, taxes, and utilities, which are generated from the property from which you are receiving income. As with other business expenses, you must remove any personal use items as well as determine any periods of time in which the property was used for personal reasons. This is the case even if you are using 1040 Schedule C or Schedule E. Let’s start with supplies.

Supplies

These expense can be very tricky and sometimes difficult to maintain, however if set up properly then there should be very few problems at tax time.
Let’s determine what items would fall into this category. Most items in this account are using day to day consumable goods purchased solely to maintain the rental place. First let’s look at the difference between “supplies” and “expenses.” Expenses are usually items that are used when consumed. An example would be a trash can, certain small appliances, food, etc. Supplies are items that you would purchase sometimes in bulk for the same purpose; however, these items can be held in inventory storage until consumed. Examples of this are bulk paper (copy, toilet, etc.), pens, pencils, bulk cleaning items, trash bags, etc. It is very important to note that these items should be inventoried periodically to monitor costs as well as quantities on hand. Postage stamps are another item which you may buy in bulk, but only use a fraction leaving the rest in inventory until used. Keeping a supplies and expenses chart of accounts is the best way to handle this.

Taxes

During the course of business there are many taxes that you might have to pay directly related to the property. As with most jurisdictions, you may receive a separate bill for your property, business, and income taxes. If you operated a rental property in which this is not the case, then as we mentioned earlier you must allocate the percentage of personal use to business use. This is common with a house in which a homeowner may have “residents” living in empty bedrooms and other spaces. This is a very important area since a miscalculation can cause large interest and penalties when discovered after a tax audit review. It is recommended that on each tax bill make a copy of the original bill and on the copy write down the calculated amounts as back up for your records. This can be somewhat complicated if you are using a Schedule E and have multiple properties and you receive a tax bill with no separation of address. Real Estate taxes are deducted as applicable to the property assessed and should not include the owner’s basis.

Utilities

This is somewhat the same as with taxes since most utilities such as electricity, water, gas, communications, and security may be paid by the landlord on a single bill. If you have multiple properties, sometimes separate bills are issued. However, if there is any personal use, you must allocate the portions which are business from the personal and report them on the appropriate tax schedules.


Shoreline CPA+John Huddleston has written extensively on tax issues for small business owners. Since 2002, he has owned his own small business, Huddleston Tax CPAs. He holds a law degree and a masters in tax law, both from the University of Washington School of Law.

Tax Credits for Landlords

This particular article of the Landlord’s Tax Guide focuses on the different types of tax credits available to landlords who rent out their property. A tax credit is better than a deduction because it is a one-for-one reduction of tax owed, while a deduction simply reduces the total amount of income that is taxable. This article will focus on two particular credits: the Rehabilitation Tax Credit and the Low Income Housing Tax Credit.

Note: None of the tax credits associated with installing energy efficient appliances or products are applicable to rental homes.

Low Income Housing Credit

The IRS allocates housing tax credits to state agencies each year. Those state agencies then award the credits to developers of qualified projects in a competitive bidding process. To be eligible, a proposed project must commit to one of two occupancy threshold requirements:

1.) Restricted rents, including utilities, in low-income units.

2.) Operate under these restrictions for 30 years or longer.

The occupancy threshold requirement must be either:

1) Twenty percent of units must be rent restricted and occupied by households with incomes at or below 50% percent of the area median income as determined by the Department of Housing and Urban Development.

2) At least 40% percent of the units must be rent restricted and occupied by households with incomes at or below 60% percent of the area median income.

The limits on tenant-paid rent are based on a percentage of area median income and adjusted for household size. This program may be combined with a program like Section 8 in order to allow the landlord to collect full market rent with the tenant only paying the maximum rent allowable to continue tax credit eligibility.

Rehabilitation Tax Credit

This credit is a bit obscure but can be very useful in certain situations. It is available at 10% of qualified rehabilitation expenditures if the building is not a certified historic structure. If the building is an historical building, then it is good for 20%  of expenditures. (In order to be considered a certified historic structure, the building must either be listed in the National Register or located in a registered historic district certified by the Secretary of the Interior as being of historic significance to the district.)

Another option when the 10% credit is available is if the building has been “substantially rehabilitated.” For this to apply, the building must have been placed in service before  1936, and the rehabilitation process must have left intact a certain percentage of the original structural framework of the building.  Finally, “substantially rehabilitated means the expense of rehabilitation exceeds the greater of your adjusted basis in the building or at least $5,000.

Note: Given the complex nature of landlord tax credits, please consult a tax attorney or CPA before proceeding.


Redmond CPA+John Huddleston has written extensively on tax issues for small business owners. Since 2002, he has owned his own small business, Huddleston Tax CPAs. He holds a law degree and a masters in tax law, both from the University of Washington School of Law.

 

Private Use of Rental Property

The guidelines associated with the personal and leasing utilization of premises are included in this article in the Rental Property Tax Guide. This may be either because you are leasing out a space in the same property which you are living in, or you have got a vacation residence that you might privately employ a few weeks out of the calendar year and rent the remainder of the time. This information will not apply to you at all if you never use your rental property for personal use. However, if you do, you will want to keep reading.

Property rented for less than fifteen days. Any time you leased your property for less than fifteen days total in the past year, you don’t have to file any of your rental revenue. If this is the scenario, then the real estate property is going to be considered personal for taxation considerations, and on Schedule A of Form 1040, it is possible to deduct any of the property associated expenditures as personal.

Employing Your Holiday Home as a Part Time Rental

Personal use test. It’s important to work with some type of numeric formula to determine the total number of days during which the rental property was used for personal use. That is the personal use test. How you deduct your rental expenses is going to largely be determined by whether or not the personal use test is satisfied. Finding out the actual quantity of days in the past year in which the real estate property was leased out at fair market value is the initial step in calculating the personal use test. The next step is to multiply that number of days by ten percent. We will label the outcome the “total days rented” or “TDR” for short. The next stage will be to figure out how many days the rental property was employed for private use. We can label this “personal use days” or “PUD” abbreviated. Look at the table below for a vision of the personal use test.

NOTE: “Personal use” consists of use by you, any other owners of the home and property, plus the families of all individuals who own the property, unless of course your family member is paying out rent at fair market value.

If TDR is…

and PUD is…

then the personal use test is…

over 14

less than TDR

not satisfied

under 14

less than 14

not satisfied

over 14

more than TDR

satisfied

under 14

more than 14

satisfied

 

If test is satisfied. If the personal use test is satisfied, you will deduct your rental expenses only to the extent of the rental income. A net rental loss will not be attainable, but when there are any additional expenditures you do not write off this year, they can be moved forward to later years, provided that there is an adequate sum of rental earnings in the tax year in which you claim them.

If test is not satisfied. Your own leasing costs will never be restricted by the rental income if the personal use test is not satisfied. You could deduct your rental costs and also have a net rental loss. There could be a few passive activity rules, however, which may still restrict the rental loss tax deduction.

Computing all of your rental expenditures. A number of expenses should be allocated between leasing and personal application. These include expenditures that will have already been charged no matter the use, such as real estate taxes and mortgage interest. Find out the whole number of personal use days. Then, you will need to determine the total quantity of TDR. After that, divide rental days by the sum of PUD and rental days. The end result is the rental percentage. Finally, you have to multiply the total cost of your expenses by the leasing percentage that you have established, and then the result will be the rental deductible part.

Leasing a Section of Your House

You need to expressly allot all your costs in between private usage and leasing use if you rent out a part of your own personal home. The IRS allows a little versatility with the method you employ; just make sure it’s consistent from year to year. Some people choose the option of taking the number of rooms within their residence along with the number of rooms within the home, and divide them. Dividing the rented sq . ft . by the residence’s total sq . ft . is another option that lots of people go for. You’ll end up with rental costs and personal costs. Those allotted to the leasing income can be deducted as such, and you can use Schedule A of Form 1040 to deduct what’s left.


Redmond CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is the owner of his own small business, Huddleston Tax CPAs. He is a graduate of Washington State University and the University of Washington School of Law.

For more information on rental property deductions check out this video from Huddleston Tax CPAs:

Tax Deductible Rental Property Expenses, Part 2: Insurance, Cleaning /Maintenance, and Repairs

Now that you are engaged in renting your property out for income, it is very important for you to ensure that certain fees and services are properly set up and recorded for tax purposes. Let’s discuss some of these expenses.

Insurance

As with most premiums, this is usually prepaid in advance for a certain period of time. An example here would be you purchased insurance for this specific property on March 2012 for $1200. The coverage period is from April 2012 to March 31, 2013. Since the coverage period does exceed the current tax year, you must apportion and allocate the premiums applicable to this current year only and carry forward the balance for the next reporting period. In this example your allowable premium deduction would be $900 (9 months April to Dec 2012) or $100 per month of qualified rental use.

Please note that some Insurance carriers frequently bundle premium packages between personal and business customers for a discounted rate. You must ensure that you only allocate the portion which is applicable to your business rental property from this deduction. The personal and non business use may be deductible on your personal income tax return. Finally, title insurance is not applicable as an expense and must be included in the Cost Basis of the property.

Cleaning and Maintenance

The day to day maintenance of the property is an allowed expense provided it is only for common areas and day to day cleanliness. These expenses are also limited to the days that are allowable rental days and not personal use days. Many property owners have contracts with local services to maintain the property on an ongoing basis to ensure it is in working and useable order. This may include such services as window cleaning, dusting, appliance cleaning and upkeep. Only these types of services are allowed, any type of structural repairs and/or changes must be allocated to the Cost Basis of the property.

Repairs

On occasion, there may be some need to repair an appliance, touch up some painting, or some task that does not require a major renovation of the property structure. These costs which are ordinary and necessary are deductible in accordance with the rental period of time.
It is important to note that these costs that are usually deductible against the income of the rental property, you must not include those periods that are considered personal days of use. Only those expenses in which are directly related to the approved rental period are allowed.

  • You can obtain the different documents outlined in this information on the IRS’s webpage. Refer to IRS Publication 527 for additional information.

Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners.  Since 2002, he has owned Huddleston Tax CPAs. He is a graduate of Washington State University and the University of Washington School of Law.

Watch this video for more about Huddleston Tax CPAs:

 

Deductible Vehicle and Transport Expenses Related to Rental Premises

When travel expenses are essential, and suit certain factors, then they become deductible. Various travel expenses that you may write off include travel to secure rent payments from occupants and to perform maintenance duties on your property. Be aware commuting to work is regarded as a private cost and not allowed for deduction. All expenses incurred from traveling to your rental property to make improvements will not be tax deductible either. A cost recovery process like depreciation will ordinarily cover that.

Actual Expenses

These costs need to be documented and supported by invoices and receipts in accordance with IRS Publication 463, Chapter 5. You’ll need a  record to backup the deductions. You’ll discover software program applications on the market by iPod, Quick Books, or Mint, as well as others. It is expected this data be reported, along with important documents, on your Schedule C or Schedule E. For people with different properties, your expenses should be allocated to the premises where costs were accrued. Only use involving the property is tax deductible, so do not incorporate any non-business or other kinds of expenses not related to the properties.

Mileage Method

Here write off just your actual mileage traveled. To illustrate, if you traveled twelve hundred miles in the course of 2012, you would write off the standard mileage rate of $0.55.5 per mile, according to current tax rates.

Using neighborhood transport including Zip Cars, metro bus companies, and automobile rental, this kind of travel must have a principal relationship to the properties and you must have documentation to support this. If working with public transport, it is encouraged that you have a log of expenses plus an individual business account for rental cars and Zip Cars to show that this use is entirely business relevant.

  • You can obtain the different documents outlined in this information on the IRS’s webpage. For more info, you can consult IRS Publication 527.

Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

Necessary Tax Forms for Reporting Rental Activity

For a landlord, to correctly account for and report your annual rental property revenue to the IRS, you must have a variety of different Revenue Service tax forms which you’ll find are highlighted within this article. As is laid out directly below, the tax documents change based on the particular official organization who owns the rental (individual, partnership, corporation, or LLC). For additional info regarding legal entity ownership, look at the article found in this Guide, titled Best Rental Property Ownership.

Quick Note: You can obtain the different documents outlined in the next paragraphs on the IRS’s webpage: http://www.irs.gov/Forms-&-Pubs. The needed documents will undoubtedly be included in any tax preparation software programs, if you’re using one.

Individual Ownership

Shared rental property ownership with a wife or husband, mutual tenancy with right of survivorship, as well as tenancy in common would be examples. All individual taxpayers will have to file Form 1040, and that is exactly where you need to start. At line 17 of the first page of Form 1040 will be the total rental property earnings or deficit, subjected to taxes. You are not allowed to take advantage of simple Forms 1040A or 1040-EZ, as a landlord with leasing income and expenses.

Schedule E. Schedule E is a certain addendum of Form 1040. Of this addendum’s many uses, only the usage of reporting rental income and expenses is useful to you. The section of Schedule E labeled as “Part I” is the one section you should fill in. A handful of fundamental notes to keep in mind: while reporting on the rental property you mutually own with another person, other than your wife or husband, you will only need to report the expenditures that you accrued and the earnings you collected. Also, do not forget that if you rented for only a portion of the entire year, or if you have been leasing part of your home, you will have to allocate expenses concerning rental and non-rental purposes. For additional tips, look at Tax Deductible Rental Property Expenses, the article collection that’s included within this Guide.

Form 4562. At line 18 of Schedule E, you will deduct the depreciation on your rental, which you’ll fill out Form 4562 to calculate. View the article entitled Depreciation Expenses for Rental Property, in this Guide, to get more details.

Partnership/Corporate Ownership

A general or limited partnership, or S corporation is included.

Form 1065/1120-S. The document a collaboration utilizes to report every one of its company activities is Form 1065, that you have to use when you have a partnership. An S corporation utilizes Form 1120-S to report its enterprise operations. Schedule K, line 2 of Form 1065 or 1120-S is the place your own total rental property losses or revenue will be reported (Schedule K is embedded within the documents).

Form 8825. This form acts like Schedule E, but is for partnerships and S corporations. It’s in essence very similar to Schedule E. Always report entire sums of any revenue and operating costs incurred by the partnership or corporation (they are allotted to each partner or investor later on).

Schedule K-1. The total rental profits or loss due to each shareholder or business partner is reported by this form, in accordance with the ownership interest of each investor or business partner. The elements of the K-1 received by each partner has to be reported on their own Form 1040, Schedule E, Part II.

Limited Liability Co-ownership

You can file like you’re an independent owner on the grounds that, for taxation uses, a single-member LLC is actually a disregarded entity (notice above). A multiple-member LLC may choose to be taxed as a partnership or as an S corporation (look above).


Seattle CPA +John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

Home Office Deductions for Landlords

A large number of business owners are leery of home office deductions, concerned that these tax write-offs are more likely to encourage an IRS audit. The IRS claims there is no meat to this. In any case, follow the rules and you should have no concerns.

Active owners of a rental property may qualify for the home office deduction. The key to this deduction is the word “active”. The landlord must do more than simply receive and deposit rent checks every month. You will need to regularly spend substantial time maintaining properties and preparing them for rent as well as seeking new tenants.

So if you qualify as an active rental property owner, the next requirement is that the home office space is used exclusively to manage your rental business.

On top of these requirements, you must meet at least one of the following expectations:

1. Your home office is used as your principle place of business.

2. You have no other fixed location where you perform administrative and management activities.

3. You interact with tenants in this office space.

4. You use another structure on your property to conduct business.

After you have applied these threshold tests and determined that the work area in your home does in fact qualify for the home office deduction, you have to look into what kind of expenses are tax deductible. There are direct and indirect types of home office deductions. Direct expenses exclusively benefit the home office area of the home, expenses such as painting or cleaning. Indirect expenses benefit the entire home and must be apportioned out between the office area and the rest of the house. Mortgage interest, insurance, property taxes and utilities are typical examples of indirect expenses. Square footage is the common system of figuring out the proportion of the home office in relation to the entire house to come up with a percentage. A 2,000 square foot home with a 200 square foot home office area would mean 10% of the indirect expenses could be deducted as part of the home office deduction. You can also depreciate the house structure (not the value of the land) in the same percentage over 40 years. However, this may complicate matters if you sell the house.

And you will want to ensure that you are keeping fastidious records in case there is an audit. You will need to be able to prove that you were entitled to any claimed tax deductions. A diagram and/or a photo will support your claim of square-footage ratios. It is wise to have your home office address listed on business cards, letter heads, or other forms of professional communication. And while using your home office to meet clients, it is wise to keep a log to keep track of meetings. You should keep relevant expense statements, such as utility bills, mortgage interest statements, insurance premium statements, property tax statements, and other appropriate expense statements.

This subject can get quite complex and the above is only intended to give you a basic understanding of the circumstances that would allow you to take advantage of the home office deduction.

Seattle Accountant has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

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Tax Deductible Rental Property Expenses, Part 1

There are many deductible expenses connected with owning a rental property. In this article we will focus on expenses regarding interest, advertising, and professional fees, these are expenses you may deduct from your gross rental income so as to calculate your net rental income.

Interest

The primary type of interest you will most likely deduct is interest on the mortgage. If you’re renting the property as its own living unit, you can deduct all of the mortgage interest you paid on Schedule E. On the other hand, if you’re renting a room in your home, or if it is a duplex and you are residing in the other unit, you need to pro rate the mortgage expense. See the article titled Personal Use of Rental Property, included in this guide, for more on how to calculate personal use. Personal use mortgage interest always goes on Schedule A of your Form 1040 and not on Schedule E. Additionally, if you own only a part interest in the rental, you will need to multiply the total amount of mortgage interest paid on the property by your ownership interest. Be aware, however, that certain expenses you pay to obtain a mortgage (such as title/recording fees and commissions) are capitalized as part of your depreciable basis for the property, and are not expensed. See the article titled Depreciation Expenses for Rental Property, included in this Guide, for more on depreciation expense. Other types of interest may also be deductible, if you incurred the interest solely for the benefit of the rental property. For example, if you took out a personal loan in order to replace carpeting, or fix the roof.

Advertising

Any fees you incur to list your property on the open market and promote the property are deductible. For example, classified ads that you purchase in the local newspaper, or any Internet advertising you pay for, are deductible.

Professional Fees

If you pay an attorney to set up a rental agreement or start court actions for you to evict a tenant, you’ll be able to deduct these charges. Also you can deduct the fees of an accountant for preparation of the Schedule E of your tax return from the year prior. Be sure to pro rate the total fee between the rest of your return versus the Schedule E portion of you return based on time spent. Any fees unrelated to the Schedule E appear on Schedule A as personal tax preparation expenses. Also any management fees or commissions to professional realtor groups for managing the property are deductible as well.

Seattle CPA has written extensively on tax and accounting topics of interest to small business owners. He is a graduate of the University of Washington School of Law with a Juris Doctorate and a Masters in Tax Law.

Huddleston Tax CPAs of Seattle & Bellevue
Certified Public Accountants Focused on Small Business

(800) 376-1785
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Huddleston Tax CPAs & accountants provide tax preparation, tax planning, business coaching, Quickbooks consulting, bookkeeping, payroll and business valuation services for small business. We serve Seattle, Bellevue, Redmond, Tacoma, Everett, Kent, Kirkland, Bothell, Lynnwood, Mill Creek, Shoreline, Kenmore, Lake Forest Park, Mountlake Terrace, Renton, Tukwila, Federal Way, Burien, Seatac, Mercer Island, West Seattle, Auburn, Snohomish and Mukilteo. We have a few meeting locations. Call to meet John Huddleston, J.D., LL.M., CPA, Tawni Berg, CPA, Jennifer Zhou, CPA, Jessica Chisholm, CPA or Chuck McClure, CPA. Member WSCPA.