Tax Credits and Deductions for Landlords and Renters to help cope with Inflation and Interest Rates.

At Bambridge Accountants, we are committed to providing you the latest updates regarding all areas of U.S. tax. We have expert tax advisors who specialize in taxation for Landlords and renters. If there is anything else that you would like us to cover on this topic, do not hesitate to contact us.

To skip to sections relevant to you please use the list below:

Recent Effects of Rising Inflation and Interest Rates on Landlords and Renters
Deductions for Landlords and Renters
Home office expenses for landlords and renters
Traveling expenses for Landlords and Renters
Information for exclusive to renters
Information exclusive to landlords

Rising Inflation and Interest Rates

The last three years have created uncertainty in the everyday life of citizens across the U.S, especially as the Consumer Price Index reached a 40-year high in March this year. Due to the pandemic and geopolitical events, the world has been experiencing a considerable chain supply shock. Between newly instituted Chinese policies, the Russia-Ukraine conflict, and Covid-19 there have been constant changes in the supply of products and commodities causing sudden price changes. This has resulted in a significant increase in the inflation rate over the last two years.

In December 2020 the inflation rate was at 1.2%, by the end of 2021 it jumped to 7%, and halfway through 2022, it has risen to 9.1%. It is easy for citizens to see how inflation has impacted their consumer prices in shops, but this has had a large influence on energy and shelter prices as well. In the last twelve months, there has been an uplift in the following costs:

10.4% increase in food costs
48.7% increase in gasoline
41.6% increase in energy expenses
5.6% increase in shelter costs

It’s estimated that these increases have caused about $500 a month of growth in expenses for many citizens. To combat this the Federal Reserve has raised the federal fund's interest rate three times this year beginning in March. This is the largest increase by the Federal Reserve in almost three decades and the fastest it has ever been increased.

Experts are speculating more increases as the year goes on. When the Federal Reserve increases the interest rate, they are attempting to curb the borrowing demand. This has prompted major banks to increase their prime rate offered to consumers for loans and most credit cards.

While fixed-rate mortgages are generally not linked to the Federal Reserve interest rate, this increase has had an impact on the Treasury yields on which mortgage rates are based. However, has not deterred real estate investing, instead, it has created a perfect buyers' market for some investors as fewer are qualified for current mortgage loans.

Effects on Landlords and Renters

From 2019 to 2021 the annual purchases of apartment buildings and rental properties have almost doubled, and this demand caused a nearly 23% price increase in rental buildings. Unfortunately, there are deficiencies in multifamily housing due to labor shortages, and chain supply failures. Between increased pricing and mortgage rates rising landlords are finding it increasingly difficult to pay back their loans, creating negative leverage for the owners.

Negative leverage is when borrowing costs have become greater than the overall return produced by the property. With returns shrinking below the interest rate on the mortgage, landlords are increasingly concerned by the prospect of being unable to keep up the required mortgage payments. To offset the negative leverage landlords are resorting to increasing the rent on their properties. As of last June, the national average cost of rent increased by 14.75%.

The effects of rising inflation and interest rates have also had a significant impact on prospective homeowners, and renters. With increased prices in the housing market and higher mortgage rates, fewer prospective home owners are meeting the banks lending requirements. These aforementioned issues have discouraged many from entering the housing market, instead opting to continue renting. An increase in renters creates a higher demand for rental properties and thus higher prices for renters.

Approximately 36% of U.S households are living in rentals and the skyrocketing prices are crowding out individuals and families that cannot handle the added burden to their finances. By increasing the Federal Reserve interest rate the Fed has set in motion a long-term plan to curb the sharply rising costs that both landlords and renters are experiencing. It can take 6 months for the federal interest rate to affect the mortgage rate and housing prices, and at minimum another year before rental prices begin to slow down. So, unfortunately, relief for many is not going to be immediate, but there are several tax credits or deductions for both landlords and renters to explore.

Tax Credits and Deductions for Landlords and Renters

Both Renters and Landlords can take advantage of:

Home Office Expenses

Up to $1,500 can usually be deducted as long as the minimum conditions are met. There are only two requirements for this deduction.

First you must regularly use a portion of your home for business, and you must be able to prove that it is your main place of business. To prove that your home is your main place of business you should either have a specific room or separate structure on the property used for business purposes. This can extend to covering internet and phone bills if they are directly used for business, you can prorate the portion of those expenses to the business.

Traveling

Traveling can be a part of any business’s expense. Some of these expenses are tax-deductible for Landlords. To qualify for this deduction the travel must be for everyday rental activities such as visiting properties, doing maintenance, and purchasing materials for repairs. If the travel plans include an overnight stay then the hotel, airfare, and food costs can be deducted as well.

For longer travel plans there must be a clear intended objective to fulfill on the trip.

There are two options for claiming this deduction either you can:

Use the standard mileage rate calculated by the IRS, but this option must be chosen the first year that the vehicle is utilized in business travel. You cannot switch to this deduction at a later date.
Alternatively, you can deduct the actual expenses for the year for gas, regular maintenance, and repairs. This would also include the hotel, airfare, and food expenses for overnight stays.

Renters

Unfortunately, there aren’t many options for tax credits and deductions for renters. Despite this, several states offer a renter’s tax credit based on a percentage of the rent to total income. For example, California, Hawaii, Maine, and Massachusetts offer some form of renter’s tax credit. How much credit is worth and what the requirements are will vary from state to state.

When signing a lease agreement renters should check to see if any portion of the rent goes to property tax. If a portion does, then it can be deducted from their taxes. Additionally, if the federal government officially declares a natural disaster, any property damage or loss can be deducted from their taxes.

Renters who are currently in college or paying off student loans have credits and deductions that they can claim. If a renter is currently in college, they can claim either the American Opportunity Credit or the Lifetime Learning Credit.

American Opportunity Credit is offered for the first four years of a student’s college education and can be claimed a maximum of four times. This credit is worth up to $2,500.
Lifetime Learning Credit is offered during the entirety of a student’s college education. This credit can be worth up to $2,000 a year for eligible students.

Renters who are paying off their student loans can deduct up to $2,500’ worth of student loan interest. If $600’ worth of interest is paid on the loan in a year, they will receive a student loan interest statement to claim on their tax return. This deduction can be combined with either of the credits above if they are eligible for them.

Lastly, renters who are self-employed have several business deductions that they can claim. To be considered self-employed an individual must receive a 1099 statement from an employer. Some of the business deductions self-employed individuals can claim are:

Self-Employment Tax Deduction represents the Medicare and Social Security taxes that all individuals are required to pay. For self-employed individuals, the rates are 12.4% for Social Security, and 2.9% for Medicare. Even though these rates are higher than traditional employees, the self-employed can deduct half of the tax from their net income, as it is treated as a necessary business expense.
Health insurance premiums that are paid for by the individual such as health, dental, and nursing are tax-deductible. This can include premiums attached to spouses and dependents.
Business Loan interest can also be deducted. This applies to loans for personal and business purposes the portion of the loan interest used for business can be claimed.
Publications, Subscriptions, and Advertising Deductions. If the business requires particular magazines, books, or newsletters then the subscription can be considered a business expense and be deducted. The subscription must be necessary and related to the business to qualify. Additionally, if the business requires advertising, those expenses can also be deducted as a business expense.
Qualified Business Income deductions can also be claimed by the self-employed. There are several conditions and special rules to claiming this deduction. The amount that can be claimed is dependent on the income earned, and your business' type. Qualified self-employed people can claim up to 20% of qualified business income from their business.
Retirement plan contributions are another deduction that can benefit the self-employed in the long run. They can reduce the individual's current tax liabilities and help build tax-deferred gains for their future use.
Rent Expenses for those who need to have an office space can also be deducted. However, it cannot be a property that the individual owns, and the rent needs to be a reasonable amount. Any equipment or furniture for the office space can also be included in this deduction.

Landlords

There are many options for landlords to explore when trying to reduce their taxes and other expenses. One of the first options for landlords is to increase their credit score, as this can help decrease their mortgage payments. When you have a high credit score you can be approved for mortgage loans from multiple lenders, allowing you to choose the lowest rate.

Some landlords may find it helpful to switch to an adjustable-rate loan, as it can have a lower interest rate than a fixed-rate mortgage. However, the rate will change according to market conditions, so it could end up being higher than the fixed rate. This can be a good choice for owners who are looking to sell their property. This is because they can take advantage of the lower rate and then sell the property before it rises.

Alternatively, some landlords may choose to refinance their loan to a lower interest rate. This could save landlords money on their payments. There is also an option to refinance the loan to have a shorter term, which will mean higher payments, but less interest over the life of the loan. Refinancing will restart the amortization of the loan, but it could be beneficial if interest rates decrease.

Another option is home equity loans, which should generally be used as a last resort since it puts up another property as collateral for the loan, but it can sometimes greatly reduce the loan interest rate.

When it comes to taxes there are many credits and deductions that Landlords can apply for:

Interest on mortgage payments home improvement loans are generally the largest deductible expense that landlords can claim. This even extends to credit cards that are utilized for paying for services or materials used in rental activities.

The Tax Cuts and Jobs Act that began in 2018 have restricted who can apply for the deduction. Landlords who earn more than 25 million from their rentals will not qualify for this. However, if they are willing to extend their depreciation schedule from 27.5 years to 30 years then they can get around the restriction.

Depreciation on rental properties and personal properties within the rental is another tax-deductible that landlords need to look out for. The IRS has determined that properties have a lifespan of 27.5 years, and as properties lose value the Landlord will be able to claim 1/27.5 of the original cost per year. This can also be extended to major improvements to the properties, such as a new roof.

Personal property within the rental such as appliances, furniture, and landscaping are also depreciable. However, because of their short lifespan, it usually isn’t worth the trouble to depreciate them. Instead, they can be claimed under the De Minimis Safe Harbor deduction, which allows taxpayers to claim up to $2,500 an item, for example, a new garage door or a fridge. For a landlord to claim the De Minimis Safe Harbor an election must be filed with their tax return every year.

Repairs and maintenance on rental properties are also deductible, but to qualify they must be normal, necessary, and reasonable in cost. For example, fixing leaks, gutters, floors, or replacing windows are all ordinary, and necessary repairs.
Pass-through tax deduction was established by the Tax Cuts and Jobs Act in 2018. It allows a deduction on special income tax. This deduction is only a short-term option for owners, as it will expire at the end of 2025. There are two choices for claiming this deduction either the owner can deduct

Up to 20% of their net rental income
2.5% of the initial cost of the rental property, and 25% of the amount paid to their employees.

Wages for employees and independent contractors can also be deducted by landlords. To this this a landlord must receive a W-2 for helping run your rental properties. These are reported on Schedule E of your tax return and are fully deductible.
Insurance placed on rental properties is fully deductible, this would include rental property insurance, flood, fire, and other natural disasters, renter default insurance, and health insurance for employees and contractors.
Taxes other than Income Tax such as property taxes, city taxes, landlord liability taxes, and more are fully claimable on Schedule E of your tax return.
Legal and Professional Services performed in the service of the rental business are all deductible as operating expenses. This can include a variety of services such as accountants, attorneys, property management companies, real estate fees, as well as the software used for bookkeeping, and landlord management