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Landlord tax deductions, for beginners

Posted by Rona Fischman November 12, 2010 02:33 PM

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There are significant tax advantages for a landlord. In contrast, single family and condo homeowners who are not landlords can deduct the interest paid on their mortgage.For the owner-occupant, thatís all the tax advantages that currently exist. All owners should keep track of expenses in caring for the home. Those costs come off any profit made upon sale, for tax purposes. (Capital gains limits are high, so this doesn't come into play much.)

Landlords run their rentals as a business. The business of being a landlord has its own tax schedule, Schedule E.

These are the records a landlord needs to keep for their accountant or tax preparer:
1. Total rent income.
2. Repair expenditures, detailed with date, who was paid, and what was done.
3. Maintenance expenditures, which include cleaning costs, trash pick-up fees and such.
4. Total property insurance.
5. Interest payment on the mortgage.
6. Property tax payment for the property.
7. Total water bill. If the landlord pays utilities, then utility bills, too.
8. Incidental bills related to renting, like fees for credit checks, bank fees, tax preparation, fees for management, fees for expenses to collect the rent, legal fees.

For an owner-occupied two-family, the repairs are divided into ownerís unit, tenantís unit and common areas. Repairs to the owner's unit are the owner's expense Ė no tax beni. The tenantís unit repairs offset the income tax on the rental income. The common area repairs are credited against the rental income by the percentage of the house that is rented. The accountant or tax preparer finishes calculating the expenses for the part of the property that is rented, plus depreciation.

For a landlord who doesnít live there, the yours-mine-ours doesnít apply. All the expenses can be used to offset the rental income.

Every year, based on the ongoing cost of running the rental unit, the tax preparer can estimate next yearís improvement budget. Thatís the highest amount a landlord can spend annually on improvements that would offset the rental income for tax purposes.

Landlords who depend on the rental income for their living income canít afford to offset all their income in repair. For bigger, more professional landlords, their goal is to turn a profit. If there is income, there are income taxes.

Improving a rental property is good business. The tax structure supports it. If a landlord can afford to put the rent money back into the property, the property pays back with fewer repair emergencies, better tenants, higher rents, and lower income taxes on rents collected.

Any questions about how this works? Did I miss anything? Landlords, do you run your rental property with a high improvement budget or do you draw income?

Tenants, do you ask your landlords to reinvest in their rentals?

Dear readers, I am thinking of stopping the landlord-tenant series at the end of this month, until next summer. So if you have topics for me to cover that I didn't get to, let me know.

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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About boston real estate now
Scott Van Voorhis is a freelance writer who specializes in real estate and business issues.

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