Owning rental properties can be a tax-saving goldmine…if you know how to mine it. Yet many property owners are missing out and leaving money on the table each year. Legal fees, depreciation, and even travel expense deductions are fair game, but most landlords don’t have the resources or knowledge to take advantage of them. The complexity of tax rules often prevents them from digging deeper into these tax benefits. Sound familiar?
We’ve got your back. Let’s break down some of the top tax benefits you could be cashing in on with a rental property of your own.
1. Depreciation
One of the biggest perks of owning a corporate rental property is depreciation, which allows you to deduct a portion of the property’s cost over time. The IRS assumes that over time, your property is going to wear down. Depreciation acknowledges that and lets you recover the costs. What’s even better is that you can also depreciate the furnishings inside your rental! So, that couch you bought to spice up your space? It’s doing more than just providing a comfy seat. It’s cutting down your tax bill, too.
Just be sure to calculate your depreciation properly—there’s a formula for that, and it could make or break your deductions.
2. Operating Expenses
Operating expenses like utilities, maintenance, cleaning services, and property management fees can typically be written off as business expenses.
Did you replace that HVAC system? Deductible.
Did you pay for landscaping to keep your property looking sharp for clients? Deductible!
Every little thing you do to keep the corporate rental running smoothly can work in your favor when tax season comes. It’s like being rewarded for doing the things that keep your property livable and rentable.
3. Mortgage Interest
If you financed your property with a mortgage, you could likely deduct the mortgage interest. Every dollar you spend on mortgage interest is one less dollar that gets taxed. This deduction can reduce your taxable income by the total interest paid over the year, making it a valuable benefit for those with financed properties.
Homeowners can deduct mortgage interest on loans up to $750,000, as set by the 2017 Tax Cuts and Jobs Act (previously $1 million). Interest on home equity loans is also deductible if used for home improvements. Landlords can deduct credit card interest on business expenses, making a business credit card essential. Additionally, when refinancing for more than the property’s value, interest is deductible if the funds are used for property improvements.
4. Property Taxes
Nobody likes paying property taxes…but if you’re going to have to pay them anyway, at least you can deduct them during tax season. Just like with your primary residence, the taxes you pay on your corporate rental are deductible as business expenses. So, while you’re begrudgingly writing that check to the local tax collector, remember it’s coming back to you in the form of lower taxable income.
5. Repairs vs. Improvements: Know the Difference!
This is where things can get a little tricky. If you fix something that was broken (say, a leaky roof or a busted furnace), that’s considered a repair—and it’s deductible in the year you incur the cost.
But if you add an extra bathroom or install high-end countertops, that’s an improvement. Improvements are great for boosting the value of your property, but they come with a caveat: you must depreciate them over time.
Don’t let the terminology trip you up—both repairs and improvements offer tax-saving opportunities, albeit in slightly different ways.
6. Travel Expenses
Need to check in on your property? You can deduct travel expenses related to your corporate rental! If you’re flying (or even driving) to check on repairs, meeting with a property manager, or overseeing maintenance, you can count those flights, gas, meals, and even lodging as deductible expenses.
Just remember—this isn’t a free pass to write off your vacation to Hawaii. The IRS is a stickler for “business purposes,” so ensure your trip genuinely revolves around the property.
7. Insurance Premiums
While paying for insurance might feel like another overwhelming property ownership expense, don’t worry—insurance premiums are deductible. Whether it’s liability insurance, property insurance, or even flood insurance, you can write it off as a business expense. Just as insurance protects your property from damage, it also protects your bottom line by lowering your taxable income.
8. Advertising and Marketing Costs
Finding corporate tenants doesn’t just happen magically. You’ve got to put some effort into advertising and marketing your property; whether that’s through online marketing, local ads, or even working with corporate relocation services. If you do it yourself, marketing is tax deductible. If you hire a property manager like AvenueWest, AvenueWest pays for those costs on your behalf.
9. Home Office Deduction
If you’re running your corporate rental business from a home office, you may also be eligible for the home office deduction. Whether it’s a dedicated room or just a small corner of your house, you can deduct a portion of your home expenses (like utilities and rent) if that space is used exclusively for business.
10. No FICA Tax
FICA, or payroll taxes, are U.S. taxes that employees and employers pay to fund Social Security and Medicare. Self-employed people typically pay both the employer and employee portions, totaling around 15.3% of their income (as of 2021). Social Security taxes apply to the first $147,000 of income, while Medicare taxes apply to all earnings.
However, rental income is exempt from FICA taxes because it’s considered passive, not earned, income. For instance, if someone earns $120,000 from freelancing, they owe 15.3% in payroll taxes. But if that same amount came from rental properties, they would not have to pay FICA taxes on it.
11. 1031 Exchange
Are you thinking about selling your corporate rental property? Don’t forget about the 1031 exchange! This secret tax gem allows you to defer capital gains taxes by reinvesting the proceeds into another similar property. That means more capital to invest in your next corporate rental project without getting hit with a hefty tax bill immediately.
Owning corporate rental properties offers substantial tax benefits across the board. Maximizing these deductions can significantly reduce your tax liability, allowing you to keep more of your rental income and improve your overall return on investment. And who doesn’t want that?
For personalized advice, it’s always wise to consult a tax professional who can help you navigate the specifics and ensure you are taking full advantage of the available deductions.
And if you’re ready to navigate the world of corporate rentals, we can help you unlock the full potential of your property.
