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.