Depreciation takes a good long time, which means waiting years for deduction opportunities. But what if you could speed that time up? Here, on behalf of The Real Estate CPA, I’ll show you how to get the most out of your taxes with Section 179 rental property deductions!
As a landlord, your best bet for tax deductions is depreciation. Depreciation is the reduction in the value of an asset due to long-term wear and tear. But, depreciation for residential rentals is slow: 27.5 years slow. That’s a long time to wait, but what if you don’t have to? Enter Section 179 expensing.
Section 179 Expensing
Section 179 expensing allows business owners to deduct the entire cost of the long-term personal property they use in their business, instead of having to wait the full amount of years to do it. This could amount to thousands of dollars in tax deductions.
Section 179 sounds great, right? Now I’ve got to throw a curve ball at you: Section 179 rental property deduction can’t be used on personal property inside rental units. So, no kitchen appliances, no carpeting, no drapes…the only exception is for those who own hotel, motel or other short-term, under-30-day-rental properties. Furthermore, you can’t deduct the cost of land, land improvements, buildings and their structural components, fences, swimming pools, parking areas, HVAC units or property outside of the United States.
But don’t write-off Section 179 as useless just yet. You have a leasing office, right? A home office? Many of the things you use in a building that is not a rental unit qualifies as a Section 179 rental property deduction. This could be computers, office furniture, maintenance equipment (lawnmowers and the like), software, cars and maintenance vehicles, telephones, cellphones and office supplies. As long as you bought it (no presents) for cash or credit from anyone who isn’t family or another business you own, and it follows the other guidelines I’ve mentioned, you can deduct it through Section 179 expensing.
Also, you must use whatever you are deducting at least 50% of the time it would have depreciated for business purposes. Depreciation rates differ depending on the asset. As an example, most office furniture depreciates in seven years. Computers depreciate in about five. You can research the depreciation rates of other pieces of property or come chat with me to learn more.
So, let’s say Sarah is a landlady. Sarah purchased two new Mac computers for her leasing office from Apple, which cost her $2500 altogether. When she does her taxes, she can deduct the full $2500, all in one tax year. Easy as that!
Rental Business vs. Rental Investments
Before you start getting any fancy ideas about the vacation home you bought as an investment, know that Section 179 rental property deductions only count for businesses, not investments. Sure, you may make a profit on it, but for a rental property to count as a business, you must work at it regularly, continuously and systematically, either on your own or with the help of a manager, agent or other staff. The house on Daytona you bought, and occasionally rent to your cousin? It's not going to count for Section 179 expensing.
Annual Deduction Limit
So back in the day, the deduction limit for Section 179 was only $25,000—not so great, but better than nothing. Once the economy took a nosedive, however, it was increased to $500,000, and continues to be $500,000 in 2017. So, deduct away, and enjoy the tax savings come early than you might have expected!
The Real Estate CPA
I enjoy nothing more than seeing my clients make the most of their real estate businesses. With a reliable CPA on your side, your taxes will be done in no time, and you’ll rest easy knowing you’re getting all the deductions possible, potentially saving you thousands. Help me help you—drop me a line to get started today.