Rental homeowners in San Diego, or anywhere for that matter, have a full plate of tax information to take care of each and every spring. In the midst of all the chaos, it is all too common that these homeowners miss out on precious tax deductions, often times due to lack of knowledge of the subtraction. Other times, they have the ability to identify the deduction, but don’t properly figure the full scope of what it entails.
It is imperative to understand that taking advantage of these deductions is the right thing to do. It isn’t shady, or more importantly, illegal, to take the necessary steps to save from Uncle Sam. Owning a rental home is difficult, and expensive, work – especially in an expensive market like San Diego. With the proper awareness and the courage to commit to these deductions, your overall tax gap will greatly decrease.
1. Employee and Independent Contractor Wages
This is one of the most overlooked tax deductions by homeowners. While you would imagine that most everyone would think to deduct costs of independent contractor work, the reality is that most landlords simply overlook jobs that aren’t major. It may be the plumber coming out to unclog a sewer line. A leaky roof beckons the call to a small roofing company to do a quick repair. Even a company making a trip to fix an appliance is reason enough. All of these things should be documented and recorded. The most minor of repairs may add up to a deduction come tax time. Any receipt that you receive from a contractor for a project large or small, keep it and write it off.
Do you have someone coming out to take care of your yard? A pool on the property needs cleaning at your expense? These are examples of property maintenance expenses that can be deducted. If you hire an individual to do these kinds of jobs, that cost becomes deductible. These are small, mindless expenses that could add up to big savings next year!
2. Interest Deductions
Interest deductions are far and away the most significant deductions that are associated with rental properties. The obvious deduction that many homeowners make is interest on the mortgage itself. This doesn’t apply to the principal of the initial payment for the property, but the current interest accrued is still a significant amount of money. This is a great strategy for significant savings at tax time.
There are actually even more ways to deduct interest besides that of the mortgage. If you find yourself in a position where you must take on a loan to make home improvements, this would be a type of loan that has deductible interest. Commonly, many landlords would need to take a loan on a full roof replacement. Fear not, this interest is deductible. Even a loan for something like an appliance would fall under home improvement loan interest. This deduction even goes as far as interest on a credit card that was used for purchasing home improvements. Keep that statement and you are set! This is largely overlooked by most landlords.
3. Travel and Business Costs
This is another commonly overlooked deduction by landlords. Owning a rental property, whether on purpose or due to circumstance, is, in fact, a business. This means that travel costs of many kinds can and should be deducted. If you have to travel to your home to interact with a tenant in any way, shape, or form, then this is a business travel expense. This mileage is deductible. If you are conducting any business in relation to your rental home, the mileage is technically deductible. It is very important that you keep all gas receipts, as well as have a good system for charting your odometer.
Your meal and entertainment costs are also deductible. 50% of your meal and entertainment expenses can be deducted while doing business. This may not seem like a significant amount, but is still well worth the effort to keep it documented.
Want to throw a staff party? Great! Not only will you build great morale for your company, but you will also earn a deduction. An organized staff appreciation is 100% deductible. Keep a good tab on this deduction. You may just find yourself throwing more staff parties.
Utilities can really add up over the course of a year. When you add up the yearly cost of electricity, water, gas, sewer, and trash services, you are looking at a rather large number. The great thing about this deduction is that it is very straightforward. If you are paying the utility expenses out of pocket for your property, then you can claim the full amount at tax time. If you have a contract that depends on the tenant to pay for the utilities, then you can still claim the full amount of utilities on your taxes, but you must report the amount in tenant-paid utilities as income. This may seem like a wash, but the truth of this is that it can push or pull you to a different tax bracket. These kind of deductions are important if you want to be in great shape when tax time rolls around.
5. Operating and Office Expenses
The classic home office deduction. This is a bit of a tricky one for the simple fact that it is flagged often by the IRS. The main reason this happens is that people try to take advantage of it in a dishonest way. The deduction is quite simple. You have to work somewhere. Whether it be a rented office space, or a home bedroom, you can claim the square footage of the office space you operate in. Be sure not to include any square footage that isn’t your actual office.
Other expenses that can be claimed for this deduction include office materials, rental software, and phone bills. These all must be kept track of throughout the year to be taken advantage of. These will quickly add up to a rather significant amount. It is worth keeping the receipts on office related purchases.
Be courageous and honest when claiming deductions on your taxes. Keep track of all business related expenses responsibly. If you have any doubts as to whether something is deductible, then it is best to keep the receipt to be safe. The rule of thumb is simple: If the IRS finds that you are being dishonest, then you will pay a penalty. If you are honest and acting in your best efforts, then chances are you will be free and clear of any IRS interaction.