When it comes to rental property, there’s a lot that you can do upfront to help ensure that you’ll be in for a smooth and relatively stress-free journey. To prepare for the worst, it is essential for every tenant and landlord to understand the 3 Day Eviction Notice and how the eviction process works.

3 Day Eviction NoticeImportant preventative measures include having an airtight screening process, clear communication, and ensuring that you’re protected by a rental agreement.

But sometimes, despite the best efforts of even the most scrupulous landlord or property manager, there will be situations where people fall through the cracks. Even the most carefully vetted tenant can go wrong, unexpectedly failing to pay the rent on time or violating the lease.

While seeking a peaceful resolution is always the best course of action, some situations can’t be resolved. In these cases, a landlord may have no choice but to evict a tenant.

Evictions, for the most part, tend to be relatively straightforward, but this process also contains specific steps that landlords are required to follow, by law. For landlords, it’s extremely important to ensure that you operate within the requirements of the law, and always follow the correct process to the letter.

In this guide –part-one in our series, we’re going to show you the first step in beginning an eviction that’s in compliance with the law. Let’s begin with a look at the 3-day notice, the notice that landlords are required to give before they can begin the eviction proceedings.

The 3 Day Eviction Notice & Eviction Process

In Colorado, the only way that a landlord can evict a tenant from any type of rental property is by going through what’s known as a ‘Forced Entry and Detainer (FED).’ This involves taking legal action to obtain a court order requiring the tenant to vacate the property. To put it another way, an eviction is essentially a lawsuit filed in court by a landlord in order to remove a tenant from a rental property.

Before a landlord can begin the eviction proceedings, though, they must first serve the tenant with a 3-day Notice. This notice should state the landlord’s intention to evict the tenant, and inform the tenant that the must fix the lease violation or vacate the property within 3 days.

Note: For tenants who are on a month-to-month lease, a landlord can terminate the lease by giving the tenant written notice of the intent to terminate ten days before the last day of the rental month. If there’s a written lease that’s for a longer time period, the notification period should be changed to the longer time.

Reasons for Eviction

While landlords are within their rights to evict tenants from their property, this can only be done for a few select reasons.

A landlord may initiate an action to evict the tenant for the following reasons:

Tenant has failed to pay rent

If a tenant fails to pay the rent on time, then a landlord can move forward with eviction proceedings.

Tenant has violated a term of the lease

A landlord can also evict a tenant if they violate the lease agreement in some way. This is one reason why it’s vitally important for landlords to ensure that they have lease agreements, in writing, that their tenant is required to sign at the time of move-in. Without an agreement, it’s much more difficult to enforce the rules, and they may not hold up in court.

Some of the most common lease violations include:

  • Keeping a pet in a ‘no pets’ rental: A ‘no pets’ policy means no pets –at all. Service animals and emotional support animals fall outside of this policy.
  • Adding a roommate(s) without notifying the landlord: Rental agreements contain the name of every adult tenant who is residing at the premises. Subletting the rental or having a roommate without the landlord’s express permission is a violation of the lease.
  • Violating HOA covenants in a community with an HOA
  • Not keeping the utilities on: If a tenant is responsible for the utilities, and falls behind in the payments or otherwise has them shut off, this is considered a lease violation as well.
  • Tenant has committed a substantial violation while in possession of the rental premises.

This could include:

  • A violent or drug-related felony on or near the rental property
  • An act on or near the rental property which substantially endangers a person or the landlord’s property .
  • Tenant refuses to leave the rental after the end of the lease, which includes a month-to-month tenant staying on after the landlord has given required notice that the lease will not be renewed at the end of the month.

Taking the Law Into Their Own Hands

While many landlords may feel tempted to proceed with evictions their own way, taking drastic measures such as forcibly removing the tenant by changing the locks, it’s important to note that this type of action is never a good idea.

For landlords, failing to follow the eviction process as outlined in the law will only delay the eviction proceedings, and could harm your case should you end up before a judge.

Here’s a look at some of the actions that landlords should never take:

  • Self-help by a landlord is illegal in Colorado. This includes locking a tenant out of the property. Locking a tenant out of their property, and you’ll run the risk of the tenant filing a lawsuit against you for damages.
  • Any lease clause giving a landlord the rights to bodily evict a tenant or the tenant’s possessions, or to change the locks on a rental is unenforceable.
  • Physical contact or intimidation on the part of either the landlord or tenant should be reported to the police.
  • If a tenant is current with rent payments but is locked out of the rental unit, a tenant may regain possession of the rental premises by obtaining a court order through the eviction process.

The 3 Day Eviction Demand Notice

So let’s get down to it. Every eviction must begin with a written 3 day eviction demand notice. It’s the law, and following this process will keep you in compliance.

Here’s how you can start a lawful eviction process.

Before filing an eviction action in court, the landlord must give the tenant notice of their intention to evict them by serving the tenant a ‘Demand for Compliance or Right to Possession’ notice, also known as a ‘3-day Notice.’

The 3-day Notice should state that the tenant must either fix (cure) the lease violation, or vacate the property within three days (not including the date of posting).

The 3-day Notice must be written but does not have to be a formal document. It should, however, contain the following:

  1. The address of the rental property
  2. Name(s) of the tenant(s)
  3. Date the 3-Day Notice is served on the tenant
  4. Explanation of why the landlord is evicting the tenant, also known as ‘the grounds’ for eviction. Grounds for eviction can include nonpayment of rent or a violation of a lease term, and the lease terms are being violated
  5. Amount of rent owed by the tenant, if the eviction is for nonpayment of rent
  6. A demand giving the tenant three days to “cure” the lease violation by either paying the past-due rent, fixing the lease violation, or moving out
  7. The landlord’s signature

Serving the 3 Day Eviction Notice

Serving the Notice may be done through:

  • A personal service that leaves the notice with a resident of the rental household who is over 18 years old.
  • Or by posting it in a conspicuous place where the tenant will have to see it. For example, by tacking it onto the front door. Take a picture of the notice posted to the front door.

As soon as possible after serving the 3-day Notice, the landlord should also mail a copy to the tenant at their mailing address. Ideally, this should be done by certified or registered mail.

Before the landlord can initiate an eviction in court, the 3-day Notice must have been posted for three days, not including the day of posting. Saturdays, Sundays and legal holidays do count for the three days, but if the third day falls on a Sunday, it’s a good idea to give the tenant through Monday to pay the rent or fix the violation.

Fixing the Problem

Once you’ve posted the notice, the tenant will have a short window of time to fix the violation. This means that if they’re late on the rent, then they should pay it within the three-day window and the eviction will be called off.

It’s important to note that some lease violations cannot be cured, and therefore if the tenant doesn’t vacate the rental by the end of three days, then they can be served an eviction notice. However, even if a tenant does vacate the property during this timeframe, they are still responsible for past-due rent and for rent through the lease term. A landlord or property manager may still follow through with the eviction proceedings and could obtain a judgement for the amount that’s owed.

The Second Notice: Notice to Quit for Repeat Violation

If the tenant does not cure the violation or surrender the property, the landlord can then send out the second notice. This one is known as a ‘Notice to Quit for Repeat Violation.’ This notice does not need to give the tenant a right to cure the violation.

For this reason, it’s important to be specific regarding which terms the tenant is violating. When posting a ‘Notice to Quit for Repeat Violation,’ it is a good idea to reference the first 3-day Notice just so there’s no confusion.

Following the Law

Finally, as a landlord, you should make sure your 3-day notice contains all of required information, and is served correctly. If the document is incomplete or served incorrectly, your tenant could show up at court to contest the case. In some cases, the judge may dismiss your case and you’ll have to start over. In some cases, you could also have to pay the tenant’s litigation cost and attorney fees.

As a landlord, it’s easy to feel overwhelmed at the eviction process. But your best course of action is to ensure that you proceed with the eviction in a way that’s in compliance with the law. If you’re uncertain about any steps in the process, or if you’d like to ensure that you get your 3-day notice right, you could always consult with an attorney just to play it safe.

 

For most landlords, being able to deduct operating expenses can make a big difference on the amount of tax that they owe. Understanding the rental property tax deductions can be complicated, but well worth the time.

But when it comes to fully utilizing those rental property tax deductions, Rental Property Taxthat’s where many landlords struggle. After all, there are so many different expenses that you can claim! Additionally, the IRS doesn’t have an exhaustive list of all the eligible expenses, just that they must meet their requirements to qualify as deductible. This means that they must be ordinary and necessary, current, directly related to your rental activity, and reasonable in amount.

Here’s a look at what you should know about operating expenses, and how you can claim them on your taxes.

Rental Tax Deductions: Current Vs. Capital

Deductions fall into one of two different categories: current and capital.

  • Current Expenses: These are generally for one-off purchases or expenses to keep the property in good working condition or to help you run your rental business. Current expenses can be claimed in whole on your tax return, and deducted entirely in the year that they occurred.In order to qualify as a current expense, the purchase or repair must be considered “ordinary and necessary,” which means that it is an ordinary expense that’s considered common in the business. This includes interest, taxes, advertising, and more. It must also be “current,” which means that it must have more short-term value than long-term. A repair to a roof has a short-term value and can be claimed as a current expense. A new roof, on the other hand, has a long-term value. Finally, your current expenses must be reasonable in amount, so be realistic when claiming your expenses. A $400.00 door handle, for example, is likely to raise some eyebrows at the IRS.
  • Capital Expenses: These, on the other hand, are improvements or purchases that are made to the property, that enhance its value –or, that will benefit your rental activity for more than one year. So, for example, a complete kitchen remodel, which would add value to your rental and benefit your property for more than one year, would be considered a capital expense.Unlike current expenses that can be claimed in the year that they were incurred, capital expenses must be depreciated, and can only be deducted a little bit at a time over the course of many years. The exact timeframe for depreciation varies depending on the item in question but it will be somewhere between 5 and 27.5 years.

Operating Expenses: What Are They?

Now that we’ve got that out of the way, let’s take a look at some of the deductions that you may be eligible for. Make sure you’re not forgetting anything this year!

Some valuable rental property tax deductions that landlords can claim include:

  • Mortgage Interest – Interest from mortgage payments and even interest on credit cards that are used for the rental can be deducted. If you have a mortgage on your property, this expense could easily represent one of your largest and most valuable deductions.
  • Depreciation of the Property Depreciation is another significant deduction. Depreciation of the property itself is considered a capital expense, and can’t be claimed all at once. Instead, it must be spread out over the course of 27.5 years.Just note that depreciation that you claim must be recaptured and paid should you sell the property at some point down the road. The IRS also doesn’t give you an option to opt out of claiming depreciation on the property, it’s a deduction that you’re required to claim. If you don’t, you could still be held liable for paying depreciation recapture tax when you sell your property.
  • Mortgage Insurance (PMI/MIP): If you have a mortgage on your property, you can deduct mortgage insurance from your rental income.
  • Taxes – Taxes, including property tax, city tax, and even taxes for any employees that you hire for your rental properties can all be claimed on your tax return. If you have a mortgage, your taxes will often be paid through this. You can find amounts on your 1098 form. If you’ve paid off your mortgage, you’ll have to keep receipts yourself, or look up your tax records online.
  • Advertising: The cost of advertising your property, including online listings or ads that you take out, can also be claimed on your tax return.
  • Insurance: Insurance for the rental or rental property business can also be deducted. This includes fire, theft, liability, and more.
  • Utilities: If you pay the utilities for your rental, you can deduct them as well.
  • Repairs and Maintenance: Repairs and maintenance for your rentals can also be deducted. Just remember that improvements must be treated as depreciation, and will have to be paid back at the time of sale in depreciation recapture.
  • Professional Services: If you hire an accountant, attorney, property manager, or other professional –their fees can also be deducted.
  • Travel Expenses: Whether your rentals are local or long-distance, your cost of travel to and from the property; including gas and airfare, can be deducted.
  • Losses From Theft or Other Casualties: If your property was damaged in a fire or flood, or if valuables were stolen or the property vandalized, you may be able to deduct a portion of the loss.
  • Tenant Screening: When it comes to tenant screening, all of the expenses associated with that can also be claimed. Credit reports, criminal background checks, identity verifications, employment and income verification, and more can all be claimed if you paid for them.
  • Commissions: Commissions can also be deducted. This includes incentives that are paid to managers and salespeople, or any commissions that you pay for tenant referrals –say you offer outgoing tenants a bonus if they find a replacement tenant for you.
  • Equipment, Supplies, and ExpensesNew equipment and supplies including a phone, laptop, camera, tablet, and even internet service, printer toner, paper, and more –as long as they’re used specifically for your rental business, can also be deducted. Just make sure you keep good records and are able to demonstrate that your purchases and expenses are for business purposes.
  • Home Office Deduction: If you use a room in your home for conducting business, you can deduct this expense as well. You can use the IRS’ simple method for calculating this deduction and deduct $5 per square foot up to 300 square feet.

Learn more about available deductions for landlords here.

Business vs. Personal Use

If you purchase something or subscribe to a service that you use for both business and personal use, you can deduct only the portion that you use for business-related purposes. To determine this, you’ll need to pinpoint how much time you use your item for rental-related purposes, and how much for personal use. Then, divide the cost between the two purposes and deduct the rental-related portion. So, say for example that you use your internet connection for official business purposes 60 percent of the time. In this case, you can only deduct 60 percent of the cost of service.

Special Rules for Certain Expenses

The IRS has created specific rules for certain operating expenses, that spell out which expenses are tax deductible, how much is able to be deducted, and in some cases, even stipulate specific record-keeping requirements.

Here’s a look at the main areas that include special rules and requirements.

  • Home Office Expenses: There are strict requirements for taking this deduction. Learn more here.
  • Meals and Entertainment: There are some IRS requirements for meals and expenses. Including the requirement that someone who can benefit from your rental activity must be present. These expenses are usually 50 percent deductible.
  • Travel: Travel expenses can be deducted from the IRS guidelines. The amount you can deduct will vary depending on the length of your trip and the time you spend on business while away. See this page for more information.
  • Vehicle Expenses: The standard mileage rate for the cost of operating your car changes from year to year. For 2017, standard mileage is 53.5 cents (0.535) per mile.
  • Business Gifts: The IRS limits business gifts to $25 per person.
  • Bad Debts: Some bad debts are deductible, but unpaid rent is generally not one.
  • Interest Payments: In most cases, you can deduct interest on money that you borrow for a business or investment activity –however, rules and restrictions apply for other types of interest.
  • Casualty Losses: For losses due to a casualty, like theft, vandalism, or fire –you usually won’t be able to deduct the entire cost of the property destroyed. Instead, how much you’ll be able to deduct will depend on whether the property was stolen, completely destroyed, and whether the loss was covered by insurance.
  • Taxes: While you can fully deduct your current year state and local property taxes on real property as an operating expense, any prepaid taxes must be deducted the following year.
  • Education Expenses: In order to qualify for an education deduction, you must be able to show that they education maintains or improves skills that are required to be a successful landlord, or is required by law or regulation to maintain your professional status.

For more information on these rental property tax deductions, and the rules surrounding them, visit the IRS Publication 463: Travel, Entertainment, Gift, and Car Expenses.

Get Organized

Your best option when it comes to claiming them is to be diligent with your record-keeping. This means keeping track of all of your receipts, invoices, and bills as expenses arise. Likewise, be sure to use a separate checking account for your expenses, and try to obtain documentation for every transaction that occurs.

As a landlord, there are a lot of deductions that you’re most likely eligible for.

Since taxes can easily eat into a significant portion of your rental income (up to 50 percent according to some estimates!) experienced investors know that taking advantage of the available deductions is key to maximizing their profits. Don’t miss out! Make this year the year that you save.

And don’t forget, if you’re stuck, it’s always a good idea to work with an experienced CPA –ideally someone who’s experienced in preparing taxes for landlords. A good accountant will be able to inform you of tax deductions that you may be eligible for and can keep you from making many common pitfalls that landlords often make when filing, helping you to save when tax time rolls around.

Please Note: While this article contains information that we’ve learned from classes and from working with our clients over the years, please keep in mind that we are not tax professionals. This information is intended to inform and to guide only, and it is not meant to serve in place of tax advice from a licensed tax professional. These principles should only be applied in conjunction with a CPA. To learn more about depreciation as it applies to your own financial situation, please consult a tax professional.

As the proud owner of rental property, there’s a good chance that you know about and are already using one of the most well-known and popular tax deductions available to landlords:

Deducting Rental Property RepairsRepairs are a much-loved deduction, and for many landlords, they represent a significant saving come tax time. They’re popular thanks to their value, as well as the fact that they’re a tangible expense. It’s easy to remember these expenses when you’re doing taxes, and not too difficult to save the receipts throughout the year –especially if you’re organized.

But while this deduction is indeed popular, some landlords aren’t aware that not every repair should be treated the same. While some are able to be fully deducted in the year that they’re incurred, for others, how they’re able to be deducted will vary depending on a few different factors.

The main difference in how these expenditures are treated comes down to one important distinction: is it a repair, or is it an improvement? The IRS also outlines several “safe harbors,” as they call them, under which you can fully deduct many repairs that would otherwise have to be depreciated more slowly over time.

Although making sense of the different distinctions and nuances of the IRS’ guidelines can get a bit complicated, in this guide, we’ll attempt to uncover the main points for classifying and deducting repairs and improvement expenses for your rental.

Property Management Repairs vs. Improvements

While rental repairs and improvements are both able to be deducted, the IRS has different rules regarding how they must be claimed.

Repairs are operating expenses that are deemed ordinary, necessary, and reasonable in amount. As long as they meet these requirements, they’re able to be fully deducted in the year that they’re incurred.

However, certain types of upkeep aren’t considered to be repairs; but instead, need to be classified as capital improvements. Improvements are things that add value to your property or benefit your property for more than one year.

Since the benefit to your property will extend beyond one year, they cannot be depreciated in just a single year, but instead must be spread out over the course of a longer period of time and claimed a little at a time on your tax return each year.

In most cases, you’re better off from a tax point of view if you can classify an expense as a repair, rather than an improvement, as you’ll be able to deduct the entire expense all at once instead of having to slowly deduct it over a long period of time. Of course, this doesn’t mean that you should never do improvements on your property, only that from a tax perspective, repairs offer more benefits.

Now, how can you tell the difference between repairs and improvements?

The IRS’ regulations spell out rules for what constitutes a repair and what is considered an improvement. This guide is fairly long, however, and quite complicated as well.

Still, generally speaking, the IRS uses the following categories to define what qualifies as a capital expense.

According to the IRS, expenses that fall under these categories must be depreciated as a rental property tax deduction.

  • Improvements: You must capitalize any expense you pay to improve your rental property. An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use.
  • Betterments: Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property.
  • Restoration: Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition.
  • Adaptation: Expenses that may be for adaptation include expenses for altering your property to a use that isn’t consistent with the intended ordinary use of your property when you began renting the property.

Here’s a look at some examples of improvements from the IRS:

Additions:

  • Bedroom
  • Bathroom
  • Deck
  • Garage
  • Porch
  • Patio

Lawn & Grounds:

  • Driveway
  • Walkway
  • Fence
  • Retaining wal
  • Sprinkler system
  • Swimming pool

Miscellaneous:

  • Storm windows, doors
  • New roof
  • Central vacuum
  • Wiring upgrades
  • Satellite dish
  • Security system

Heating & Air Conditioning:

  • Heating system
  • Central air conditioning
  • Furnace
  • Duct work
  • Central humidifier
  • Filtration system

Plumbing:

  • Septic system
  • Water heater
  • Soft water system
  • Filtration system

Interior Improvements

  • Built-in appliances
  • Kitchen modernization
  • Flooring
  • Wall-to-wall carpeting

Insulation

  • Attic
  • Walls, floor
  • Pipes, duct work

Three Safe Harbors

For most landlords, being able to deduct expenses all at once in the year that they were incurred is always preferable; and better than having to depreciate them.

Thankfully, the IRS provides what’s known as “safe harbors” –conditions that landlords can use to deduct certain rental-related expenses –in one year.

Here’s a look at these three safe harbors now:

  • The small taxpayer safe harbor
  • The routine maintenance safe harbor
  • The de minimus safe harbor

If an expense falls under any of the safe harbors, then it can be treated as a currently deductible expense and deducted entirely in the year that it occurs.

In short, these safe harbors make life easier and allow you to deduct expenses that otherwise would have to be depreciated.

In order to determine whether an expense qualifies as a deduction, first, determine whether it falls under one of the safe harbor provisions. Secondly, if no safe harbors apply, you’ll then want to determine whether the expense is a deductible repair or an improvement.

With this in mind, here’s a look at the three safe harbors now:

  1. Safe Harbor for Small Taxpayers (SHST):The safe harbor for small taxpayers (SHST) could easily rank as one of the most important safe harbors for small landlords. Under this safe harbor, you can deduct all of your annual expenses for your rental –including repairs, maintenance, and improvements –without having to worry about whether or not they qualify as repairs as opposed to improvementsHowever, it’s important to note that there are some important restrictions when it comes to using this safe harbor, and of course, you’ll also need to keep track of all of your expenses throughout the year as well.In order to qualify, the total amount of maintenance, repairs, and improvements that you’ve paid out during the year must total less than $10,000 or 2% of the unadjusted basis of the building –whichever’s less.Additionally, the SHST can only be used for buildings with an unadjusted basis of $1 million or less. Although if you own more than one rental unit or building, the $1 million limit is applied to each separately.Finally, in order to qualify, you must have average annual gross receipts of no more than $10 million during the three preceding tax years.You can learn more about the Safe Harbor for Small Taxpayers in Nolo’s article: Small Taxpayer Safe Harbor For Repairs and Improvements.
  2. Routine Maintenance Safe Harbor:Under the routine maintenance safe harbor, expenses that qualify as routine maintenance are deductible in a single year. With this safe harbor, there are no dollar limits and any landlord can use it, regardless of the amount spent on maintenance. However, there are a few limits on when this safe harbor can be used.
    1. Take a look: Routine maintenance is recurring work done to keep a building in operating condition, and includes two activities:
      • Inspection, cleaning, and testing of the building structure and/or each building system, and
      • Replacement of damaged or worn parts with comparable and commercially available replacement parts.

      There are two main limitations on routine maintenance: the ten-year rule and the no betterments rule.

    2. The Ten-Year Rule - Maintenance qualifies for the routine maintenance safe harbor only if, when you placed the building or building system into service, you expected to perform this maintenance more frequently than once every ten years.
    3. No Betterments or Restorations - This safe harbor is intended for expenses incurred to keep the property in operating condition, but it does not apply to major remodeling projects. Additionally, you can’t use this safe harbor when you’ve taken a casualty loss.
  3. De Minimis Safe Harbor - Finally, there’s also the de minimis safe harbor. With this option, landlords can deduct any low-cost personal property items used in their rental business. In most cases, the maximum amount is $2,500 per item. All expenses you deduct using the de minimis safe harbor must be counted toward the annual limit; the lesser of 2% of the rental’s cost or $10,000.

Rental Property Repairs vs Improvements

If your expenses don’t fall under a safe harbor, then you’ll need to determine whether they are improvements or repairs. While repairs can be deducted in one year, improvements must be depreciated and deducted over several years.

In order to determine whether it’s a repair or improvement, you’ll need to delve into the IRS’ repair regulations and determine what the unit of property (UOP) in question is. You’ll then want to decide whether the expense resulted in an improvement.

Under IRS regulations, buildings must be divided up into nine different UOPs.

Here’s a look at them now:

  1. Building Structure
  2. Heating, ventilation, and air conditioning (HVAC) systems
  3. Plumbing systems
  4. Electrical systems
  5. Escalators
  6. Elevators
  7. Fire-protection and alarm systems.
  8. Security systems
  9. Gas distribution system

Generally speaking, the larger the UOP, the more likely the work will be considered a repair, rather than an improvement.

Joseph Lewis, CPA and Partner at Isler CPA explains this concept well in his article: Rental Property Repairs: to Expense or to Capitalize? That Is the Question. “Work on an engine of a vehicle is more likely to be classified as an expense that must be capitalized if the engine is classified a separate UOP. By contrast, if the UOP is the vehicle, the engine work has a better chance of passing muster as a repair.”

Any work done to any of the above building systems that improves that system in some way must be depreciated.

Deducting Repairs and Maintenance

Repairs and maintenance are different things, but you’ll want to deduct both of them on IRS Schedule E. You’re required to list each type of expense separately, so try to keep track of them throughout the year as well.

At the end of the day, landlords benefit more from a tax perspective by taking advantage of the safe harbors, or making repairs; rather than upgrades. While upgrades can be a necessary part of owning a rental, it’s always a good idea to consider the long-term tax implications when deciding whether to repair or replace an item.

Additional Resources

Here are some additional resources on rental property tax deductions and repairs and improvements.

Please Note: While this article contains information that we’ve learned from classes and from working with our clients over the years, please keep in mind that we are not tax professionals. This information is intended to inform and to guide only, and it is not meant to serve in place of tax advice from a licensed tax professional. These principles should only be applied in conjunction with a CPA. To learn more about depreciation as it applies to your own financial situation, please consult a tax professional.

Taxes aren’t exactly something that we look forward to, but for landlords and real estate investors, at least, there may be some reason to rejoice. If you own rental property, there are landlord tax deductions that can help you out.

Landlord Tax DeductionsThe tax code tends to favor real estate investors and having rental property can open the door to a tremendous number of tax deductions and credits that you could be eligible for, all of which can make a significant dent in your tax bill.

The key to maximizing your income with rental property is taking advantage of all of the tax benefits that are offered to you. Yet many landlords are unaware of just how many there are!

Some deductions are more valuable than others, but overall, these write-offs can help you to increase your rental revenue considerably. Of course, how much you stand to benefit will vary widely depending on a range of factors including your filing status (married, single, joint-filing-separately?), tax status (business, investment?), tax bracket, the number of properties that you own, and how you structure your investments (LLC, sole proprietorship?).

If you’re a first-time landlord, or even an experienced investor, having a firm grasp of the tax code –as it applies to you will prove to be a tremendous advantage. It’ll help you to know how you should structure your investments, allow you to accurately calculate your taxes for prospective investments to see if a property’s worth investing in, and if you have an accountant, can help you to ensure that you both are on the same page.

With this in mind, let’s take a look at the basics of the tax code, as it applies to landlords. Read on for an overview of the tenets of taxes, and to see which deductions that you may be able to claim.

Taxes Landlords Are Required to Pay

First, let’s take a look at the different types of taxes that you’re required to pay as a landlord:

  • Income tax on rental income and property sales
  • Social Security and Medicare taxes (some landlords)
  • Net investment income taxes (some landlords)
  • Property taxes

Here’s a look at each type of tax now.

Income Tax on Rental Income

Rental income that you receive is taxable and subject to federal income tax. When you file your annual tax return, you’ll add your net rental income to your other income for the year, such as income from your job or investment income.

Additionally, you may be subject to state income tax as well. Forty-three states also have income taxes, with the exceptions being Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. For more information on your state’s income tax law, visit Tax Sites, or your state tax agency’s website.

Income Tax on Property Sales

If you sell a rental property, the profit on the sale is added to your income for the year and is also subject to tax. If you’ve owned the rental for more than one year, this income will be taxed at capital gains rates, which in most cases, are lower than income tax rates. However, if you sell your property and use the proceeds to purchase a similar property, using what’s known as a like-kind exchange, or a Section 1031, you can defer the tax on your profits.

Social Security and Medicare Taxes

Many landlords are also required to pay Social Security and Medicare payroll taxes, or Federal Insurance Contributions Act (FICA). While employees pay half of these taxes and employers pay the other half, self-employed people must pay them all themselves.

These are two separate taxes. Let’s look at each now:

  • Social Security TaxSocial Security tax is a flat tax of 12.4% on net self-employment income or, if you have employees, on their wages up to an annual ceiling –that’s adjusted for inflation each year. In 2017, this ceiling was $127,200.
  • Medicare Payroll TaxThere are two different Medicare tax rates –2.9% tax up to an annual ceiling of $200,000 for single taxpayers and up to $250,000 for married couples filing jointly. All income above this amount is subject to tax at a 3.8% rate.

Combined Social Security and Medicare tax is 15.3%, up to the Social Security tax ceiling –whether you’re self-employed or an employee.

If you hire employees to work in your rental property business, you may have to pay and withhold Social Security and Medicare taxes. Your share of these taxes, though, as an employer is deductible.

However, income you earn from a rental property is not subject to Social Security and Medicare taxes, even if your rental activities constitute a business for tax purposes. The exception to this is if you’re a landlord who provides “substantial services” to your tenants, such as the services provided by hotels or bed and breakfasts.

Net Investment Income Taxes

Net investment income tax is a 3.8% tax that affects many higher-income landlords. This is a tax on unearned income including rental income and gains from selling property. If your adjusted gross income exceeds $200,000 if you’re single, or $250,000 if you’re married filing jointly, you will be subject to this tax.

Property Taxes

Finally, if you own property, you’ll have to pay property tax. These are taxes imposed by cities, counties, or other jurisdictions, and are a tax on the value of your rental.

What Is Considered Rental Income?

Of course, your rental income includes the rent that your tenants pay, but it can also include other payments as well.

  • Security Deposits - Security deposits that you plan to apply to the tenant’s final rent payment must be claimed as income in the year that you receive them. However, if you plan to return the deposit to your tenant at the end of their rental term, then do not include it as income. If you end up keeping some of the money because your tenant doesn’t live up to the terms of the rental agreement, you should include the amount that you keep in your income for the year.
  • Interest on Security Deposits - Any interest earned on security deposits should also be included in your income unless your state requires landlords to credit that interest to tenants.
  • Advance Rent Payments - Any rent that you receive in advance, before the period that it covers should be included in your rental income for the year that it was received.
  • Property or Services Paid in Lieu of Rent - Property or services that you receive from a tenant as rent must also be included as rental income.
  • Rental Expenses Paid for by Tenant - Any rental expenses that a tenant pays to you are also considered rental income. This includes utilities, repairs, and more. These expenses can then be deducted by you.
  • Fees or Charges Paid by Tenant - Any fees that tenants pay are also considered rental income. This includes charges for paying late rent, parking fees, storage facility fees, or even laundry income.
  • Lease Cancellations - Payments for lease cancellations are also considered rental income.
  • Leases With an Option to Buy - If your rental agreement gives your tenant the right to buy your rental property, the payments you receive under the agreement are usually considered rental income.

Landlord Tax Deductions

One of the great things about owning investment property is the wealth of tax deductions that are available for landlords.

The law allows you to subtract operating expenses for your rental –including repairs and maintenance, as well as other expenses including mortgage interest and depreciation from your gross rental income, to determine your taxable income.

Here’s a look at some of the deductions that landlords are able to take:

In many cases, landlords end up with so many deductions that they show a net loss when calculating their gross rental income. In these cases, you’ll owe no tax on your rental income. This tends to be more common during the first few years of owning rental property, when the rents may be lower, and you may be claiming more for depreciation.

In fact, in some cases, you may show a loss for tax purposes, even if you’ve actually earned more income than you’ve paid in expenses –due to the often-significant deductions of mortgage interest and depreciation.

Your Tax Status Affects Your Deductions

Rental properties can be considered a business, an investment, or in rare cases, a not-for-profit activity.

If your rental activities qualify as a business, you’re entitled to all the landlord tax deductions listed above, however, if your rentals are considered an investment, you’ll lose certain deductions. Of course, landlord tax deductions for not-for-profits are extremely limited.

Your tax status will be determined by how much time and effort you put into your rental activities, and whether you earn profits each year.

Property Ownership Affects Taxes

Keep in mind that how you structure your rental property purchases will affect the type of tax returns that you must file.

The main ownership options for most landlords are:

  • Sole proprietorship
  • General partnership
  • Limited partnership
  • Limited liability company (LLC)
  • Corporation
  • Tenancy in common
  • Joint tenancy

These different types of ownership can be divided into two main categories; individual ownership and ownership through a business entity.

Small landlords, those who own one to ten residential rentals, generally own their properties as individuals. In fact, according to one government survey, individuals owned 83% of the 15.7 million rental housing properties with fewer than 50 units. (Department of Housing and Urban Development and Department of Commerce, U.S. Census Bureau, Residential Finance Survey: 2001 (Washington, DC: 2005).)

Partnerships, limited partnerships, LLCs, and S corporations, on the other hand, are all “pass-through” entities. This means that the entity itself doesn’t pay taxes, but the profits or losses are passed through to the owners who include them on their tax returns.

Because pass-through taxation permits property owners to deduct losses from their personal taxes, it’s generally considered the best form of taxation for real estate ownership. And with the new Tax Cuts and Jobs Act, there may be even more incentive for investors to structure their purchases this way. Pass through entities with “qualified business income” are now eligible for a 20% deduction.

Sure, it’s not our favorite topic, but since taxes are often one of the single biggest outgoing expenses that we have each year, aside from the mortgage itself, looking for ways to reduce your tax bill can often result in significant savings.

If you’re a landlord, it’s worth spending some time familiarizing yourself with the tax code, to find out if you’re saving as much in tax as you could be. It’s also a good idea to consult with a qualified CPA, to ensure that you’re structuring your purchases in a way that’ll be most beneficial for your tax situation, and to make sure you’re not missing out on any valuable tax deductions that could make a big difference in the amount of tax that you owe.

Many thanks to Stephen Fishman's Every Landlord's Tax Deduction Guide, for providing clear, concise information on taxes as they pertain to landlords. See Every Landlord’s Tax Guide to learn more about taxes for landlords.

Please Note: While this article contains information that we’ve learned from classes and from working with our clients over the years, please keep in mind that we are not legal or tax professionals. This information is intended to inform and to guide only, and it is not meant to serve in place of tax advice from a licensed tax professional. These principles should only be applied in conjunction with a CPA. To learn more about depreciation as it applies to your own financial situation, please consult a tax professional.

After three consecutive down quarters, the Colorado Springs Rental Market experienced some nice gains for the second quarter of 2019.

The overall volume of rentals is up nearly 41% for all of El Paso County in the Second Quarter of 2019. Q2 is traditionally a strong quarter but this kind of jump is significant.

Average Price Per Square Foot

The average price per square foot is at 0.88 cents. This is down a little bit from the previous quarter but this number remains consistently positive over the previous 2 years.

Popularity and Affordability

We used the data from the first two quarters of 2019 to look at the most popular zip codes as well as the most affordable zip codes. We are using zip code information as opposed to neighborhood information because we feel like it gives us a more realistic picture. A hot neighborhood tends to generate activity in the surrounding neighborhoods as well. So, zip codes seemed to be the best way to capture those types of emerging trends.

Let's start with popularity

From a sheer volume standpoint, the 80817 zip code takes the prize for the most properties rent in the first half of 2019 at 117 units. This doesn't really come as much of a surprise because this is Fountain, Colorado the closest zip code to Fort Carson.

Just east of Fort Carson is Fountain, Colorado and the 80817 zip code

Fountain, Colorado has seen rapid growth over the past five years. The area has seen new residential projects like "Lorson Ranch" as well as a number of new commercial projects. Amenities like shopping and restaurants have grown in the Fountain area making it a much more convenient area to live in.

Affordability

Rental rates in El Paso County Colorado have been steadily climbing since 2012. In many neighborhoods, this has created a real affordability problem. We are always on the lookout for affordable neighborhoods and one area that has emerged is the 80903 zip code.

80903 Is the zip code for downtown Colorado Springs

80903 is home to much of Downtown Colorado Springs. While we don't necessarily associate affordability with the downtown area, the southeastern portion of this zip code does offer more affordability. This encompasses some very popular neighborhoods like Shooks Run and Prospect Lake. Located just west of Memorial Park. South of the Colorado Springs Central Business District and east of Interstate 25, the location is really convenient.

The median rent in the 80903 zip code is $1,195 and the median square footage is 1,060 square feet. This puts the median price per square foot at $0.92

Colorado Springs Luxury Rentals

At the other end of affordability is the luxury market. In Colorado Springs that niche is now occupied by the 80921 zip code. This zip code is home The Flying Horse neighborhood. This is a private luxury golf course community located in the Northgate area of Colorado Springs.

80921 is the zip code for the Flying Horse neighborhood

The median rental price for this neighborhood is $2,295 and the median square footage is 3,252 square feet. this is a beautiful neighborhood with lots of amenities in the neighborhood and close by. Here is a list of available rentals in the 80921 zip code.

In Conclusion

As a Colorado Springs Property Management Company, it is important to stay on top of market trends. We examine these types of big-picture market statistics on a quarterly basis, so, if you are interested in the El Paso County or Colorado Springs residential rental market, make sure to bookmark our page.

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