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Top Ten Tax Deductions for Landlords in 2023

February 1, 2023 by Marco Santarelli

No landlord would pay more than necessary for utilities or other operating expenses for a rental property. Yet millions of landlords pay more taxes on their rental income than they have to. Why? Rental real estate provides more tax benefits than almost any other investment. The cost of operating and maintaining a rental property, such as repairs, insurance, and property management fees, are tax-deductible.

This can reduce taxable income and provide a financial benefit. Every year, millions of landlords pay more taxes on their rental income than they have to. Why? Because they fail to take advantage of all the tax deductions available for owners of rental property. Investment real estate provides more tax benefits than almost any other investment. Often, these benefits make the difference between losing money and earning a profit on a rental property.

Here Are the Top Ten Tax Deductions for Owners of Residential Rental Property:

1. Interest

Interest is often a landlord's single biggest deductible expense. Common examples of interest that landlords can deduct include mortgage interest payments on loans used to acquire or improve rental property and interest on credit cards for goods or services used in a rental activity. Interest paid on a mortgage used to finance the purchase or improvement of a rental property is generally tax-deductible.

2. Depreciation

Landlords can claim depreciation on the cost of a rental property over time, which can provide a tax benefit by reducing taxable income in the short term. The actual cost of a house, apartment building, or other rental property is not fully deductible in the year in which you pay for it. Instead, landlords get back the cost of real estate through depreciation. This involves deducting a portion of the cost of the property over several years.

3. Repairs

The cost of repairing or maintaining a rental property is tax-deductible, as long as the expenses are directly related to the rental property and are not capital expenditures. The cost of repairs to rental property (provided the repairs are ordinary, necessary, and reasonable in amount) is fully deductible in the year in which they are incurred. Good examples of deductible repairs include repainting, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows.

4. Local Travel

Landlords are entitled to a tax deduction whenever they drive anywhere for their rental activity. For example, when you drive to your rental building to deal with a tenant complaint or go to the hardware store to purchase a part for a repair, you can deduct your travel expenses.

If you drive a car, SUV, van, pickup, or panel truck for your rental activity (as most landlords do), you have two options for deducting your vehicle expenses. You can:

  • deduct your actual expenses (gasoline, upkeep, repairs), or
  • use the standard mileage rate (56.5 cents per mile for 2013). To qualify for the standard mileage rate, you must use the standard mileage method the first year you use a car for your business activity. Moreover, you can't use the standard mileage rate if you have claimed accelerated depreciation deductions in prior years, or have taken a Section 179 deduction for the vehicle.

5. Long-Distance Travel

Landlords can deduct travel expenses related to managing a rental property, such as the cost of traveling to inspect the property, attend tenant-landlord meetings, and make repairs. If you travel overnight for your rental activity, you can deduct your airfare, hotel bills, meals, and other expenses. If you plan your trip carefully, you can even mix landlord business with pleasure and still take a deduction.

However, IRS auditors closely scrutinize deductions for overnight travel — and many taxpayers get caught claiming these deductions without proper records to back them up. To stay within the law (and avoid unwanted attention from the IRS), you need to properly document your long-distance travel expenses.

6. Home Office

Provided they meet certain minimal requirements, landlords may deduct their home office expenses from their taxable income. This deduction applies not only to space devoted to office work but also to a workshop or any other home workspace you use for your rental business. This is true whether you own your home or apartment or are a renter.

7. Employees and Independent Contractors

Whenever you hire anyone to perform services for your rental activity, you can deduct their wages as a rental business expense. This is so whether the worker is an employee (for example, a resident manager) or an independent contractor (for example, a repair person).

8. Casualty and Theft Losses

If your rental property is damaged or destroyed from a sudden event like a fire or flood, you may be able to obtain a tax deduction for all or part of your loss. These types of losses are called casualty losses. You usually won't be able to deduct the entire cost of property damaged or destroyed by a casualty. How much you may deduct depends on how much of your property was destroyed and whether the loss was covered by insurance.

9. Insurance

Premiums paid for insurance coverage on a rental property, including liability insurance and property insurance, are tax-deductible. You can deduct the premiums you pay for almost any insurance for your rental activity. This includes fire, theft, and flood insurance for rental property, as well as landlord liability insurance. And if you have employees, you can deduct the cost of their health and workers' compensation insurance.

10. Legal and Professional Services

The cost of professional fees, such as the cost of hiring a property management company or accountant, are tax-deductible. Finally, you can deduct fees that you pay to attorneys, accountants, property management companies, real estate investment advisors, and other professionals. You can deduct these fees as operating expenses as long as the fees are paid for work related to your rental activity.

Did You Know?

Did you know that:

  • Landlords can greatly increase the depreciation deductions they receive the first few years they own rental property by using segmented depreciation.
  • Careful planning can permit you to deduct, in a single year, the cost of improvements to rental property that you would otherwise have to deduct over 27.5 years.
  • You can rent out a vacation home tax-free, in some cases.
  • Most small landlords can deduct up to $25,000 in rental property losses each year.
  • A special tax rule permits some landlords to deduct 100% of their rental property losses every year, no matter how much.
  • People who rent property to their family or friends can lose virtually all of their tax deductions.

If you didn't know any of these facts, you could be paying far more tax than you need to.

It is essential to keep in mind that certain tax deductions can be subject to limitations or restrictions and that an individual's eligibility for particular deductions might be determined by their particular tax status as well as the kind of rental property they own. Furthermore, due to the fact that landlords are required by the IRS to establish the authenticity of all tax deductions, it is essential to keep precise and comprehensive records of all costs associated with rental properties.

In a nutshell, tax deductions for landlords can assist in lowering the amount of income that is subject to taxation and provide a financial benefit. However, it is essential to have a solid understanding of the constraints and boundaries imposed by particular deductions, as well as the need of maintaining precise records to substantiate the legality of deductions claimed. As always, be sure to consult with your tax adviser or tax professional.

Filed Under: Financing, Real Estate Investing, Taxes Tagged With: Tax Deductions, Tax Deductions for Landlords

Property Taxes by County: Where do People Pay the Most and Least in 2022?

December 6, 2022 by Norada

An unavoidable truth in life is taxes. If you’re a homeowner, you’re no exception. But, what you pay can vary significantly depending on where you live. So, the question is: where do people pay the highest property taxes and where do people pay the least?

With that in mind, our team at House Method conducted a study to dig into property taxes across the United States. Using the most current Census data from the American Community Survey, we compiled the median annual property tax in each U.S. county and compared it to five years ago. We also looked at the effective tax rate (the property tax divided by the value of the home) and the 5-year change for that rate. 

Here are some of our most interesting findings:

  • The average property tax increase over 5 years was 18%.
  • 8 counties pay $10,000 or more in property taxes.
  • Of the top 20 most expensive counties, 55% are in New Jersey.
  • 93% of all counties saw an increase in taxes over the last 5 years with 11 counties seeing more than double.
  • All 6 of the counties with the highest effective property tax rate are in New York or New Jersey
  • 5 counties saw their effective property tax rate double in the last 5 years.

For our full findings, check out our report below. Our study has a number of interactive maps to show our data on all 3,128 counties analyzed. You can hover over each county to view the data or use the search function on the upper-left side by typing in the county’s name.

Property Taxes by County

The interactive map above shows a visualization of how median property taxes in counties compare across the United States. The darker colors are higher dollar amounts and the lighter colors are lower amounts. 

The Counties with the Highest Property Taxes

Eight counties are tied as the most expensive with at least $10,000 in median annual property taxes Note that the Census only tracks up to $10,000:

  • Bergen County, New Jersey
  • Essex County, New Jersey
  • Union County, New Jersey
  • Nassau County, New York
  • New York County, New York
  • Rockland County, New York
  • Westchester County, New York
  • Falls Church City, Virginia

Our data showed that California's northeast and Bay Area have the highest concentration of the highest property taxes. In fact, 11 of the top 20 most expensive counties are in New Jersey. New York has 6 and Connecticut has 1, bringing the northeastern part of the country to 18 of the 20 most expensive. Falls Church City in Virginia and Marin County in California are the other 2 in the top 20. Every county in the top 20 has a median annual property tax of at least $7,700.

The Counties with the Least Property Taxes

Conversely, the south and parts of the midwest come in as the least expensive. Louisiana and Alabama came in as two of the states with a number of counties in the bottom 20 least expensive counties. Out of the 20, Louisiana has 10 and Alabama has 3. 

There are five counties tied for the county with the least amount of property taxes. Each of these has a median amount of $199 a year. 

  • Choctaw County, Alabama
  • Northwest Arctic Borough, Alaska
  • Avoyelles Parish, Louisiana
  • East Carroll Parish, Louisiana
  • Madison Parish, Louisiana

Next, let’s see how these taxes have changed from five years ago. 

The 5-Year Change in Property Taxes

Because home values have been soaring in recent years, we also analyzed property taxes over five years. The map above visualizes the percent change in annual property taxes. When you hover over each county, you can see the actual dollar change (which is also listed in the table at the end of this study). 

The average percent increase was 18% which equals about $225. 301 counties (9.7%) saw an increase of $500 or more.

One of the most interesting findings is that 11 counties more than doubled in five years, and many of them are in Texas. These are the 11 counties:

  • Terrell County, Texas (167%)
  • Grant Parish, Louisiana (125%)
  • Upton County, Texas (121%)
  • Borden County, Texas (121%)
  • Petroleum County, Montana (115%)
  • Zavala County, Texas (111%)
  • Kent County, Texas (110%)
  • McMullen County, Texas (108%)
  • Webster County, Georgia (104%)
  • Garfield County, Montana (104%)
  • Stevens County, Kansas (101%)

Of the 3,128 counties analyzed, 93% saw an increase in property taxes with 5% having an increase of 40% or more. 6% of all counties saw a decrease and 1% had no increase.

Effective Property Tax Rate by County

Next, we looked at how home values played into how much counties pay in property taxes. What we analyzed is the median property tax divided by the median home value to calculate an effective tax rate. As in, this is how much of the home’s value are residents paying in taxes each year. 

The Counties with the Highest Effective Rates

We found that the states and areas with the highest amount of property taxes also had some of the highest effective tax rates. It means homeowners in New Jersey and New York are likely to both pay the most dollars but also pay the highest rates. Here are the highest 22 counties (9 are tied for the final position):

  • Camden County, New Jersey (3.5%)
  • Orleans County, New York (3.2%)
  • Allegany County, New York (3.2%)
  • Monroe County, New York (3.1%)
  • Salem County, New Jersey (3.0%)
  • Gloucester County, New Jersey (3.0%)
  • Cortland County, New York (2.9%)
  • Passaic County, New Jersey (2.8%)
  • DeKalb County, Illinois (2.8%)
  • Atlantic County, New Jersey (2.8%)
  • Cattaraugus County, New York (2.8%)
  • Winnebago County, Illinois (2.8%)
  • Onondaga County, New York (2.8%)
  • Schenectady County, New York (2.7%)
  • Lake County, Illinois (2.7%)
  • Cheshire County, New Hampshire (2.7%)
  • McHenry County, Illinois (2.7%)
  • Kendall County, Illinois (2.7%)
  • Sullivan County, New Hampshire (2.7%)
  • Sussex County, New Jersey (2.7%)
  • Warren County, New Jersey (2.7%)
  • Broome County, New York (2.7%)

The Counties with the Lowest Effective Rates

Looking at the counties who are taxes the least on the value of their homes, there are 6 all with a 0.1% rate. Two are in Louisiana, 2 are in Alaska, 1 is in Nevada, and 1 in North Dakota.

  • Concordia Parish, Louisiana
  • Eureka County, Nevada
  • East Feliciana Parish, Louisiana
  • Denali Borough, Alaska
  • Sioux County, North Dakota
  • Northwest Arctic Borough, Alaska

After that, there are a whopping 42 counties all with a 0.2% effective property tax rate. 18 counties (43% of the 42 counties) are in Louisiana and 15 are in Alabama (36%).

The 5-Year Change in Effective Property Tax Rates

Similar to how we analyzed how the median amount of property taxes changed over the last five years, we looked at how the effective property tax rates alternated over the same period. The map above visualizes the percent change. If you hover over each county, you can see the numerical change as well (the current rate minus the old rate).

There are 5 counties with a percent change of over 100%:

  • Garfield County, Montana (230%)
  • Catron County, New Mexico (214%)
  • McPherson County, Nebraska (213%)
  • Stevens County, Kansas (174%)
  • Loup County, Nebraska (110%)

Unlike how almost every county saw an increase in the amount of property taxes in dollars, most counties saw a decrease in effective real estate tax rates. Of the 3,128 counties analyzed, 1741 (56%) saw a decrease in their rates. 1,274 (41%) saw an increase and 100 (3%) saw no increase. 

Below is a table with our full data set. The table is both sortable by clicking on any of the column headers and searchable by typing in the box in the upper left.

 

Final Thoughts

Our study shows that property taxes vary significantly from state to state and county to county, both the amount paid and the effective rate. The northeast and parts of California, Texas, and Illinois all have some of the highest. The south and parts of the midwest tend to be on the lower end. Additionally, there have been significant changes in the past 5 years as home values have risen.

However, if you’re a homeowner, no matter where you live you’ll still have a tax bill to pay! We hope our study helps our readers understand how where they live stacks up against the rest of the United States.

Methodology

We analyzed data for every county in the U.S. Census American Community Survey from 2020 and 2015 (5-year averages). The 2020 dataset was used as that is the most current dataset available. Using that data, we analyzed:

  • Median property (real estate) taxes paid by homeowners with and without mortgages
  • Median home value of homes with and without mortgages

Using the data, we were able to compile an effective property tax rate by dividing the median property taxes paid by the median home values. Note that the Census does not give the specific median for any property taxes over $10,000 in a county.


Originally posted on: https://housemethod.com/blog/property-taxes-by-county/

Filed Under: Real Estate Investing, Taxes

When a Roth IRA Meets Real Estate Investing

August 6, 2019 by Marco Santarelli

Real estate is the most popular alternative asset The Entrust Group clients own in their Self-Directed IRAs. You have a lot of options when it comes to the type of account you can hold to invest in real estate, but today, we’ll discuss investing in real estate using Roth IRAs and show you the benefits, for both you and your beneficiaries.

[Read more…]

Filed Under: Real Estate Investing, Self-Directed IRA Investing, Taxes

3 Business Structure Mistakes Real Estate Investors Make

December 24, 2018 by Marco Santarelli

Real Estate Investment LLCStarting A Real Estate Investment LLC

Why have an LLC?

There are mainly two reasons why you want any kind of business structure:

Pay less tax, and protect your assets. LLCs can be especially helpful if there are multiple owners of a property. When you create an LLC, you’ll create an operating agreement that outlines the rights and responsibilities of each member of the LLC.

This can help you seamlessly manage your rental property business and also protect each member of the LLC in case of legal trouble.

Before you jump into creating your LLCs for your real estate holdings, there are a few things to consider.  Do NOT make these three mistakes while creating an LLC for your real estate investment company.

[Read more…]

Filed Under: Asset Protection, Getting Started, Real Estate Investing, Taxes

Buying an Investment Property Under the New Tax Plan

November 7, 2018 by Marco Santarelli

Given the new proposed United States tax plan from the Trump administration, investing in real estate has some potential implications for a new investor. Most consider the changes extremely beneficial to first-time real estate investors in particular.

To cover the basics first, the existing tax structure allows for real estate investors to write-off all the expenses of owning and running a rental as those properties are considered a business operation. In addition, any interest on the mortgages for these investments along with any repair or management costs can be deducted pre-tax on the total income of the property so that the property owner is only taxed on the actual cash flow they’re earning from the investment.

[Read more…]

Filed Under: Financing, Real Estate Investing, Taxes

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