Landlord Tax Planning

Saving-MoneyIf you are a landlord, you are likely interested in landlord tax planning.  There is no better time to prepare for this year’s taxes than January 1 – of two years ago.  If you waited too long, and are now worried about your taxes, there is only a limited number of things you can do.

I plan all year on my taxes.  There are capital improvements to make, replacing items that may be working fine but will help keep a tenant or make it easier to get a new tenant.  Ways to speed up expenses and possibly defer revenue.

Here are some things to ponder to help minimize any tax burden you have.

Keep in mind, I am not a tax professional.  I consult with my own accountant on a paid basis a few times a year, and attend several tax seminars.  Talk to your own accountant before you ever take my advice.  I am on the cash method of accounting, not accrual basis, so that is my take on this article.

Recognize what A Business Expense Is

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.

Business expenses are the cost of carrying on a trade or business.  That means any expense that is necessary in the course to run a business.  Nothing more, nothing less.

Basic Rental Expenses

There are the basic landlord expenses.  Property taxes, depreciation, insurance, homeowner association (HOA) dues.  There are also utilities, which can include electric, gas, garbage, water, WiFi, snow removal, lawn mowing, etc.  That could also mean gas or oil purchases to run a mower or snow blower.

Vehicle Expenses

You can either depreciate a vehicle, or take the mileage route.  Or lease a vehicle.

If you deduct mileage, remember all these trips that are deductible.  A trip to the bank to make deposits.  Driving to the property to collect rent or inspect the rental, you can drive by as many times as you want, even multiple times per day.   Every trip to the store to buy supplies, even if you forgot something and had to make another trip.  Do not forget the obvious miles, trips to show properties and drop off leases.  All these miles are deductible, both ways.  There are plenty of phone apps that help, and each receipt has an address where you went.  It’s easy to track.

Use Actual Cost, not Mileage for Vehicles

If you are a landlord, you need a truck.  I drive a F350 diesel, 4×4 crew cab.  Do not skimp, an F350 cost roughly the same as a similarly equipped Ford F150.  If you have a truck, it is likely going to cost you more to run it than the standard IRS mileage rate of .54 a mile in 2016.  Use the actual expense method and have a dedicated vehicle.

It makes a difference as to the GVWR of the vehicle.  It also makes a difference as to the length of the bed of the truck, if you buy a truck.  Personally, I think if you buy a truck with a bed length less than six feet, you may as well paint it pink and let your daughter drive it.

Buy a Truck

I do demolitions and need to haul debris to a dumpster.  Pull stumps out.  Plow snow at my rentals.  I used to mow the grass and still may have to.  Hauling appliances or even a vacuum cleaner is easier in a truck.  Cleaning out a rental after a sub-par tenant, a truck is a must.  A 5-gallon pail of paint is easy to haul in a truck, even if there is a bit of wet paint on it.  What if it tips over and the plug on the top falls out?  No problem, and that has already happened to me.

How about a paint sprayer, or an air compressor, and both at the same time?  A table saw and a miter saw, both on a portable stand.  Tool boxes and supplies in the back seat.  I run out of space on my truck all the time.

If you use the expense method, you can deduct fuel, insurance, car washes, oil filters and oil (or oil changes for you non-DYIs).  Air filters, windshield wash, tires, brakes and rotors, etc.  Anything that keep the vehicle running.  Cell phone holders, seat covers, floor mats, trash cans for the truck, window cleaner, ice scrapers, tools that you need to work on it, etc.

I lease a vehicle from myself, and pay myself the exact amount of the depreciation deduction.  That way, there is no gain to report on my personal taxes, or any loss.  It is the same deduction as if my business would have purchased it, but allows the business to have minimal assets.

Maximize Year End Expenses

Be sure you maximize your expenses, but do not buy what you do not need.  Any business expense purchased by year end is deductible.  I fill up my fuel tank on 12/31.  Pay any insurance that is due in January.  Purchase new vehicle tabs.  Buy extra supplies, toilet flappers, smoke alarms, flags, batteries, cleaning supplies, stamps, etc.  Buy office paper and envelopes.  Pay your office cell phone early.  Buy TurboTax, Quicken or other software.  Any expense I know I will have in the next few months I buy before year end.

Want a Christmas gift for your tenants?  Buy restaurant Gift Cards.  If you get an extra $10 bonus card, keep it for yourself.  You do not want your tenant to waste the $10 by not using it during the right time-frame.  Have an office holiday party in January, buy what you need for it in December.  If you know you have business travel next year, book and pay for it this year.

Can you pay property taxes early?  Some taxes are due in January, pay them in December and get this year’s deduction.

Any expense or item that you pay for this year, even if paid by credit card that does not come due for a month or more, can be deducted this year.

I purchase anything that I know I will use in the next year or two.  Of course, that means next year I will be light on expenses, but there never seems to be an end to the expenses.  And when you spend an extra $1,000 on supplies, it saves over $300 in taxes.  And an extra $1,000 is nothing in the realm of total landlord expenses, but it makes me feel good.

Recognizing Revenue

If you take in rent on 12/31, it is considered revenue for that year.  While that early rent may seem to balance out early rent received at the end of last year, it makes small time accounting difficult.  Especially when the early rents are paid by different tenants.

I have to issue Certificate of Rent Paid (CRP) forms to my tenants.  That is on an annual basis, they should match what I received in rent for the year.  If I have 11 months of rent for a tenant in one year, the tenant could question that, even if I gave them 13 months next year or last year.  It creates problems I do not need.

If I have too much declared in the CRP forms, and they do not match my income reported, it may cause problems too.  It’s hard enough to keep track of income and expenses, having the same revenue counted in two different years for different purposes makes it more difficult.

I close my rent collection office after all rents are received for the year, and do not open it up again until January 1.  I never even know if any rent is paid in late December until 1/1 of the next year.

Sales and Use Tax

I hate this tax, but I pay it.  Every penny.  Think you got away from paying sales tax as you purchased something on Amazon?  Not quite.  You owe use tax.  If you sell things, you owe sales tax.  This is true in every state with a sales tax.  You need to track which purchases you paid sales tax on and more importantly when ones you did not.

I do not sell anything, or provide taxable services anymore, so I only have to pay use tax.  7.125% on items that I purchased and the seller did not collect tax.  Amazon takes taxes out sometimes.   I run a report that shows my purchases.  Luckily, most items I purchase are local, so very little Use Tax is owed.  If I purchase $2,000 worth of items online that do not collect sales tax, that is $142 I have to send in.

Capitalized or Expensed?

The Internal Revenue Service simplified the paperwork and recordkeeping requirements for small businesses by raising from $500 to $2,500 the safe harbor threshold for deducting certain capital items.  That is great news.  No longer do you have to depreciate carpet that costs less than $2,500 over five years, only to see a tenant ruin in in two years.  Or a refrigerator, or a furnace under $2,500.

A business can still claim otherwise deductible repair and maintenance costs, even if they exceed the $2,500 threshold.

Of course, there is always a Section 179 expense for even larger items.

What do you do to maximize your deductions?

17 Replies to “Landlord Tax Planning”

  1. I’ll likely have to talk to my accountant to figure out what sort of expenses I can deduct on the Airbnb front. We’ve been renting out a room on Airbnb this year and have made a great income from it (much more preferable to getting a roommate), but unfortunately, I can’t really figure out anyway to tax shelter it. Solo 401(k) doesn’t appear to be an option since this is really “passive” rental activity.

    We did purchase some sheets and had some maintenance issues this year, including repairing a broken furnace this winter and buying a new dryer, but not quite sure if that’s something we can deduct part of the expenses for given that we also live in the house and directly benefit as well.

    1. Thank you for reading!

      You have office expenses. And if you only rent for 14 days or less, you do not have to declare it. See if you can keep the 14 days separate from the AirBnB days and income.

      You have office expenses, supplies and perhaps even some travel to investigate other AirBnB places.

  2. Eric,
    I liked your idea of leasing a truck from yourself. I finally bought me a Tacoma and loving it but even more, I am now more loving the idea of leasing it to myself so I can cover the payments. Can you shed some light on it please? or you can email me 🙂

      1. Thank you for reading!

        All you have to do is buy a vehicle for your business ‘B’. List it as an asset for your business, and write off directly. You can do it personally in a schedule C, or a separate business entity.

        Then, charge your other business ‘A’ to use the truck. My payments were exactly the same as the depreciation, therefore no losses or gains. The expense to the business is the same if it leased or owned the truck directly, and no income tax is avoided either way.

        The only difference is the vehicle is not a business ‘A’ asset, if it is leased from a separate business ‘B’. No different than leasing from Ford, except the Ford is your own business.

  3. wow, these are great tips. Please keep these posts coming.

    I’ve been logging millage. My car transmission went out, I’ll be deducting that too.

    Mr.W made me created an LLC for my newest rental, so it will be crazy to see how things are going to work out with taxes.

  4. Does anyone have a go to company for PC insurance on rentals, I have 4 rental houses and haven’t found it tougher to get them insured.

  5. Thanks for writing this. We just started investing in real estate — we’re about to close on our third house, and I’ve been curious as to what tax planning is required. I’ve never used an accountant to do any of my taxes, but am now considering it with the rental properties. Do you think you can DIY or would you suggest I finally bite the bullet and talk with a professional?

    1. Thank you for reading!

      I have 8 buildings. I do my own taxes, and consult with an accountant for a couple of hours a year. He gives me advice, and I implement. TurboTax for my LLC’s. An Accountant is only going to fill out the forms, you still have to provide the information.

      I use Quicken Home and Business to track income and expenses. That produces an P&L. All expenses are allocted to each LLC via a simple formula based on income produced. If a building has 20% of revenue, they get 20% of expenses. Unless I know the actual numbers, like taxes, interest, rental income, etc.

  6. Thank you for taking the time to share your advice and experience. I’m liking and following you on Facebook and will check back here regularly.

    Are you also a member of MHA (MN Multi-housing Agency). Some of the topics you covered would be great topics for their monthly investor’s meetings!

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