Tax secrets for savvy landlords
In his thorough and easy-to-understand guide on taxes and residential rental property, Stephen Fishman simplifies the complicated and shows landlords how to save on taxes. This book cannot be recommended too highly.
The author, an attorney, explains rental property tax deductions clearly and details how to maximize tax benefits by using “hidden deductions” that are unfamiliar to many landlords.
When it comes to landlord categories, Fishman emphasizes the important distinction between a real estate investor and a real estate business owner. Running a business -- where the owner earns a profit from his or her properties and works on them regularly, systematically and continuously -- produces far greater tax breaks than investing in income property.
The business owner can claim extra deductions, such as home office expenses, and up to $102,000 in deductions for business equipment (but not property furnishings). An additional deduction of up to $5,000 is available for getting a rental business started. An investor cannot claim any of those deductions.
Another difference occurs when a property is sold and a loss occurs. The investor can claim only $3,000 in capital loss each year against ordinary income. But the business owner can claim unlimited losses in the year of asset sales under Internal Revenue Code 1231.
Fishman uses lively examples to explain tax information. Most are based on court decisions, which he explains in laymen’s terms. His best chapter explains how to maximize depreciation -- a noncash deduction for estimated wear, tear and obsolescence even if the building is appreciating.
For tax-deductible repair expenses and capital improvements, which must be depreciated over many years, the author uses a chart comparing rental property work such as roofing, electrical and window work. Fishman’s advice: Patch, mend and make do, but don’t replace if you want maximum deductions.
Other advice: Don’t file your tax return early (unless you expect a big refund), don’t file electronically and explain any items that the IRS might question.
