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How Landlords Can Maximize Their Tax Savings

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Every property manager has the same goal — to make the most profit possible. To do this, you’ll need to leverage your knowledge of tax deductions and depreciations to understand what you can and can’t claim when tax season rolls around.

How much can you write off for repairs on rental property? What do rental property repairs include? These are some questions that will be answered below. Continue reading to experience more tax savings for your property.

Distinguishing between a repair and an improvement

Many property managers and landlords have difficulty understanding the complex rules and regulations the IRS sets forth concerning what changes you can count as either a repair or improvement in your property.

It’s important to note that the IRS categorizes repairs and maintenance rental property improvements differently. To ensure accurate deductions, you’ll need to be able to differentiate between these repairs and capital improvements.

1. Repairs

Can you write off repairs on a rental property? Luckily, the answer is yes. When considering whether something is a repair or an improvement, remember that repairs are those changes that are necessary when maintaining a safe and usable property.

Repairs must meet four criteria: They must be ordinary, necessary, current, rental-related and reasonable. Some examples of repairs could be patching holes in ceilings, fixing leaky faucets or repainting scuffed or dirty walls.

2. Improvements

Improvements are those things that landlords may do to enhance the value of their property beyond repairs. These projects are extensive — they add a new component like an extra bathroom, or they convert the space for a different purpose, like converting a retail space into a gym or spa for commercial property.

It’s useful to know that if the expense incurred doesn’t lead to a substantial increase in value for the space, it is most likely a repair.

Immediate deductions vs. depreciation

In order to maximize your tax savings, you’ll need to understand the world of depreciation and deductions. Tax deductions are immediate, while depreciation plays out over a number of years. How do you leverage these differences to your advantage?

Immediate deductions:

Immediate deductions basically accelerate those that would otherwise be spread out over a longer period of time. They do this by allowing the landlord to deduct the full cost of their eligible new investments the year that they are conducted.

These immediate deductions act as a shield against the negative effects of inflation, which can eat away at the value of deductions that are taken in future years. The full deduction upfront allows landlords and property managers to have a higher after-tax ROI. It also allows these managers and landlords to reinvest and grow their businesses.

Depreciation:

Deductions allow you to reduce your taxable income by accounting for the inevitable fact that the systems and appliances in your property will wear and tear over time. This depreciation will be spread out over several years, depending on the IRS’s depreciation schedules.

Depreciation is not optional. If your property meets the criteria, you must depreciate it according to IRS rules and procedures.

Related: 5 Steps to Tax Season Success

Best ways to classify expenses as repairs

Being a landlord or property manager can feel overwhelming. However, the best way to not only manage a property but also to get the most out of your tax returns is to keep meticulous records. Classifying your expenses becomes much easier when you have easily accessible and accurate documentation of each expense. Here are some tips for getting the most out of this year’s return.

1. Document tenant complaints:

Having a relationship of trust with your tenants should encourage them to come forward with complaints or reports of necessary repairs with the expectation that you’ll fix them. Document each complaint to have some proof when it comes time to document your deduction.

2. Prioritize preventative maintenance:

To retain as much profit as possible, many landlords and property managers will try to limit the amount of large repairs they need to conduct. When you prioritize preventative maintenance, you reduce the necessity of these large-scale repairs while having the peace of mind that preventative maintenance is always fully deductible.

3. Track repairs and improvements separately:

Don’t make tax season any harder than it needs to be — categorize your books based on whether the action was a repair or improvement. This is a much easier way to file taxes and list the expenses on Schedule E. Avoiding an IRS audit should always be top of mind, and accurately categorizing these expenses is a great way to do so.

4. Use property management software:

Keeping such meticulous records can be tedious. Look into property management software to automate many of these bookkeeping and deductible-tracking tasks. Some tools that quality property management software boasts include tenant complaint logging, expense tracking and bank reconciliation.

Shop around for different software to find the best one for you and your business. Be sure that whatever tools that software offers are what you need help managing in your day-to-day.

Using taxes to your advantage is all about knowing what repairs and improvements you can qualify for savings from the IRS. It can be difficult to strike a balance between immediate deductions and depreciation, but hopefully, the tax tips above will help you navigate your next tax season.