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2023 Tax Updates Landlords Should Know

Posted: March 01, 2023

There are several factors that will determine your success as a landlord. Obviously, taking protective measures in the tenant screening process is an important part of the equation. When you have quality tenant screening measures in place, you put yourself in a position to only rent to quality tenants who will be dependable with their rent payments. Having quality tenants in your properties also lessens the likelihood that your property will suffer significant damage.

However, tenant screening is only one of the most important aspects of being a successful landlord. It is also crucial that you understand how to take advantage of tax breaks offered by the federal government. Obviously, you want to keep as much money in your pocket as possible, but failure to fully comply with IRS regulations can lead to heavy fines.

As 2022 comes to a close, there are some tax updates that will be made available to landlords in 2023. Whether you own a single-family home or a large apartment complex, it’s vital that you understand these tax updates and what they mean for you.

Inflation Will Continue to Impact Taxpayers
If you’ve been to the grocery store or the gas pump in the last few months, you’ve seen the impact of inflation. As a landlord, you’ve probably also felt the effects of inflation when paying for seemingly minor maintenance issues at your property. Those inflation effects will continue to be felt when you pay your taxes in 2023. The increase in inflation will impact the inflation-adjusted amounts will be around 7.1%, more than double the 3% increase seen in 2022.

The Pass-Through Deduction
Even though the implementation of the 20% pass-through deduction began in 2018, tax professionals report that many landlords are not aware of it. If you are going to take advantage of this deduction, you need to do so now, as it is slated to be scrapped by 2025. In order to qualify for the 20% pass-through deduction, you must:

• Own your property through a pass-through entity. This can be an LLC, partnership, or another pass-through entity.
• Earn a net profit from the property in 2022.
• Have a positive taxable income.

Additionally, the rental activity must be considered “business purposes” instead of investment activity. Unfortunately, the IRS has not provided any examples of what is considered business purposes, making this a difficult break for landlords, especially those who only own one or two properties, to qualify for.

However, the IRS “safe harbor” for the pass-through deduction, which has also been in place since 2018, changes in 2023. The most important aspect of the “safe harbor” is the ability to prove that you have spent 250 hours or more performing rental services. Beginning in 2023, that 250-hour criterion can be met by providing 250 hours of rental services in any three of five consecutive years, ending with the current year.

Activities that can be applied toward that 250-hour requirement include, but are not limited to:
• Advertising the subject property/properties
• Negotiating and signing leases
• Tenant screening and verifying application information
• Collecting rent
• Managing the subject property/properties
• Purchasing materials needed for the subject property/properties
• Supervising employees

Landlords will continue to be able to claim the depreciation of a property, and the costs associated with keeping the property up. As a landlord, it is crucial that you understand how to legally take advantage of every tax break available to you, including the Pass-Through Deduction, which may allow you to deduct up to 20% of your earnings.

In order to maximize the likelihood that you’re taking advantage of every available tax break, you should work with a tax professional who understands real estate law and real estate investing. Working with one of these specialized tax professionals can put you in a position to achieve long-term success in real estate investing.