How to deduct rental business startup expenses on your taxes
It’s tax season! If you started a rental business this year, you’ll want to know how to deduct all your expenses. Or perhaps you’re researching how to start a rental business and need to know how taxes work.
This guide explains how to deduct startup expenses, what the tax rules are for expenses after you start the business, and changes to the 2018 tax laws that affect landlords.
Rental property startup expenses
Use the $50K rule.
Keep startup expenses under $50,000. You can deduct $5,000 the first year and amortize the rest over the next 15 years. Above that amount, the first year deduction becomes less and less.
The $50,000 limit is easy to meet for most rental businesses. But it can be exceeded with a BRRR—buy, renovate, rent, refinance. That renovation can certainly add up.
What expenses can be deducted during the startup phase?
The “startup” phase is before the unit is rented and no income is coming in. Any expenses that incur during this period are considered “startup” expenses.
These expenditures can include:
- Repairs that get the unit or property ready to rent
- Office expenses like office supplies, phone service, or office space
- Time related to researching rental properties
- Pre move-in rental expenses such as landscaping, handyman, cleaners, or leasing agent
- Any business permit or license fees
- Fees for attorneys, accountants, property managers, or other professional services
When starting up a rental business, try to keep these expenses under $50,000. Do this by holding off on items that can be purchased after the place is rented. Once it is rented, you can deduct your expenses fully each year.
Tax write-offs for rental businesses
Each year, landlords can deduct many of their expenses related to their rental business.
Related: How to track property expenses and streamline taxes
What can landlords deduct on their taxes?
As a landlord, you can deduct many expenses on your taxes. Keep all your receipts and use a CPA (certified public account) to make sure you don’t miss a write-off. Each one counts!
- Interest on the mortgage
- Personal property used in the rental or office space
- Travel to and from the rental—including gas, upkeep, and wear and tear
- Contractor costs for repairmen, property managers, leasing agents, cleaners, or handymen
- Professional services such as lawyers and accountants
How does the 2018 tax law affect landlords?
Landlords benefited from the 2018 tax law.
An updated pass-through law lets landlords “pass-through” the profits from their rental property to their personal tax rate (IRC Sec. 199A). If you make $30,000 in profits on your rental properties, for example, and your personal tax bracket is 24%, you would pay $7,200 in taxes.
If your rental business qualifies as a business, now through 2026, you can deduct 20% of your rental income plus expenses. From the previous example, if you make a profit of $30,000 from your rental properties, you can deduct 20% from your profit. This brings your taxable income to $24,000. If your tax bracket is 24%, you now pay $5,760 in taxes, saving $1,440. Be sure to ask your CPA if you qualify for this bonus deduction.
The updated 2018 tax law benefits landlords. Make sure you get all the new deductions available to you. Find a tax accountant that understands taxes for landlords. The new tax law is complicated, so it’s time to bring in the experts to get your landlord deductions right.