Tax write-offs for US expats, in partnership with TFX. Written by Veronica Rhodes.
Many US citizens living abroad keep their rental properties back home and either live off the rental income, or use it to fund investments. There are however a variety of tax write-offs that expats may not be aware of, or perhaps are not fully utilizing. Find out more about the deductions you can claim and how to maximize your savings.
If you’re a landlord, you know that there are a lot of expenses involved in owning and managing rental property. But did you know that there are a number of tax write-offs available to help offset those costs? This is specific to American taxpayers and is of importance to those living abroad who may not be in touch with current legislation. In this blog post, we’ll highlight some of the most common tax deductions landlords can claim. So whether you’re just getting started in the rental business or you’ve been at it for years, be sure to read on for these helpful landlord tips!
Can You Write Off Property Taxes on Rental Property?
You can deduct certain rental expenses on your tax return if you get rental revenue from the leasing of a housing unit. Mortgage interest, property tax, operational expenses, depreciation, and maintenance are examples of these costs.
You can deduct the costs of managing, conserving, and maintaining your rental property as regular and necessary expenses. Ordinary business expenses are those that are common and widely accepted. Interest, taxes, advertising, maintenance, utilities, and insurance are examples of necessary expenses that are judged appropriate.
You can deduct the price of certain materials, supplies, repairs, and maintenance that you perform to keep your rental property in excellent working order. If the expenses paid by the renter are deductible rental expenses, you can deduct them. You can deduct the same amount as a rental cost if you include the fair market value of the property or services in your rental income.
However, the cost of renovations is not deductible. Only if the money spent is for betterment, restoration, or adaptation to a new or different use qualifies a rental property as upgraded.
How Much Can You Write Off for Property Taxes?
Starting with 2018 taxes, the Tax Cuts and Jobs Act (TCJA) restricted the property tax deduction, as well as other state and local taxes. State and local tax deductions, including property taxes, were capped at $10,000 ($5,000 if married filing separately). Previously, there was no restriction on the amount that might be deducted.
What are the Most Common Rental Property Tax Write-Offs?
There are a number of rental property write-offs that landlords can claim for rental property. Some of the most common include:
1) Mortgage Interest
The most common deductible item for a landlord is interest. Mortgage interest payments on loans used to acquire or renovate rental property, as well as interest on credit cards for goods or services used in a rental business, are common instances of interest that landlords can deduct. The Tax Cuts and Jobs Act reduced the interest deduction for landlords earning more than $25 million from their rentals beginning in 2018. However, by agreeing to depreciate their rental property over 30 years rather than 27.5 years, such landlords can escape this limit.
2) Maintenance and Repairs
Repairs to rental property are entirely deductible in the year in which they are incurred (assuming the repairs are ordinary, necessary, and fair in amount). Repainting, repairing gutters or flooring, repairing leaks, plastering, and replacing broken windows are all instances of deductible repairs.
3) Personal Property
The cost of personal property used in a rental activity can normally be deducted in a single year utilizing the de minimis safe harbor deduction (for property costing up to $2,000) or 100 percent bonus depreciation, which will be available from 2018 through 2022. Appliances or furniture in rental units, as well as gardening equipment, are examples of personal property.
4) Pass-Through Tax Deduction
Most landlords will be eligible for a new pass-through tax deduction under the Tax Cuts and Jobs Act beginning in 2018. This is not a rental deduction, but rather a specific income tax deduction. Landlords may be entitled to deduct (1) up to 20% of their net rental revenue, or (2) 2.5 percent of the initial cost of their rental property plus 25% of the amount they pay their staff, depending on their income. This deduction will be phased out after 2025.
For the majority of the driving they perform for their rental business, landlords are eligible to a tax break. You can deduct your travel expenditures when you drive to your rental building to respond to a tenant complaint or go to the hardware shop to obtain a part for a repair. However, you cannot deduct the cost of travel you take to improve your rental property; these costs must be added to the property’s tax basis and depreciated over a long period of time.
You have two alternatives for deducting your vehicle expenses if you drive a car, an SUV, a van, a pickup, or a panel truck for your rental activity (as most landlords do). You can do the following:
- Use the usual mileage rate
- Deduct your real expenses (gasoline, maintenance, repairs)
To be eligible for the regular mileage rate, you must utilize a car for your rental activity for the first year. You can deduct your flight, hotel costs, food, and other expenditures if you travel overnight for your rental activity. You may blend landlord business with pleasure and still receive a deduction if you organize your vacation wisely.
However, IRS investigators scrutinize overnight trip claims thoroughly, and many taxpayers are caught claiming these deductions without adequate documentation to back them up. You must correctly document your long-distance travel expenses to keep within the rules (and prevent unwelcome IRS attention).
6) Home Office
Landlords can deduct their home office expenses from their taxable income if they meet certain minimum conditions. This deduction is applicable not only to office space, but also to a workshop or other home workstation used for your rental business. This is valid whether you own or rent your home or apartment.
For your rental activity, you can deduct the rates you pay for nearly any insurance. This comprises rental property fire, theft, and flood insurance, as well as landlord liability insurance. You can also deduct the expense of your employees’ health and workers’ compensation insurance if you have them.
If you’re a landlord, it’s important to be aware of the different tax write-offs for US expats that are available to you. By taking advantage of these deductions, you can reduce your taxable income and save money on your taxes. Get in touch with TFX today for more information about how to claim these deductions and maximize your tax savings. We can help you file your taxes correctly and ensure that you get the most out of your rental property investment.