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 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.

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