What types of federal tax relief measures are there for rental property owners?
The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, authorizes more lenient rules for business loss and business interest expense deductions. The American Rescue Plan Act (ARPA) of 2021 extended many of the CARES Act laws and includes some additional tax provisions. Here are the details.
Excess Business Losses for Rental Property
The IRS under the Tax Cuts and Jobs Act (TCJA) prohibited taxpayers from deducting excess business losses on their current year tax returns. Any business losses in excess of $250,000 ($500,000 for taxpayers married and filing a joint return) were suspended and carried forward to future tax years. The Coronavirus Aid, Relief, and Economic Security Act temporarily eliminated this rule for tax years beginning in 2018 through 2020. The American Rescue Plan Act did not extend the suspension of the excess business losses provisions beyond tax year 2020.
If you are eligible, you may amend your 2018, 2019 or 2020 tax returns in order to take advantage of this relief.
Potential Net Operating Loss Deductions
With the impact of the financial crisis, you may have losses that exceed your total income for the year. The CARES Act includes a provision that allows taxpayers to carry back any losses experienced during tax years 2018, 2019, and 2020 for up to five years, reducing your tax liability from previous years and providing some financial relief. The American Rescue Plan Act continues the abatement of loss limitations through the end of 2026.
Business Interest Expense Deduction Limits
The Tax Cuts and Jobs Act allows a 30% deduction for business interest expenses on a taxpayers' current year tax return. For any nondeductible business interest more than 30%, the remaining portion is carried forward to a future tax year.
The provisions of the CARES Act allows taxpayers to increase the eligible business interest expense deduction to 50% for tax years 2019 and 2020. If you have already filed your 2019 or 2020 tax return, you may be eligible to amend the return to take advantage of this provision.
The American Rescue Plan Act established that targeted Economic Injury Disaster Loan (EIDL) grants are not included in gross income. The ARPA also confirms that expenses paid with targeted EIDL grants are tax deductible if such expenses would be tax deductible if paid with other funds. This results in targeted EIDL grants being treated similar to Paycheck Protection Program (PPP) loans.
Is there tax relief for rental property owners at the state level?
Municipal Liquidity Facility (MLF)
Indirect relief may be available through a $500 billion fund that the Federal government has created to purchase bonds issued by states, cities, and other local municipalities. The relief provision applies to cities with more than 250,000 residents and counties with more than 500,000 people. However, the regulations guarantee that a minimum of two cities or counties within each state will be eligible regardless of population.
The funds have been set up to help support state and local governments who have experienced lower revenue due to the pandemic, allowing those entities to in turn help their local communities. If eligible, your local government may be able to use those funds to help with property tax relief for their citizens.
State and Local Property Tax Relief
Although most state and local governments across the country declared a national disaster as a result of the coronavirus pandemic, it may still be difficult to determine whether or not you might be eligible for property tax relief.
While some states like California and New Jersey have issued state-level declarations, these types of property tax relief declarations are typically determined on a local level and your eligibility for such relief may depend on what is included in your local government bylaws. If you have questions on what type of relief you may be eligible for, you may want to ask a lawyer or tax professional about what options are available.
How can rental owners save money on taxes?
One of the easiest ways to reduce the taxes on your rental income is to make sure that you are taking all the deductions that you are entitled to. Mortgage interest and depreciation are often two of the biggest expenses that rental property owners have each year. Other common rental property expenses include repairs, insurance and legal and professional fees. You may also be able to deduct travel expenses, which is often overlooked by rental property owners. You can deduct travel expenses when you drive to the property to handle tenant issues, when you go to the hardware store to buy parts to repair the property, or similar travel that is performed because of the rental activity.
If you are using the accrual accounting method, you are generally required to recognize rental income when the rent is due, regardless of whether or not you actually received the rental income. This can cause significant issues when a rental property owner must record income for rent that is not paid. However, if it is determined that the past due rent will not be paid and is therefore a worthless debt, you may be able to deduct the unpaid rent as a bad debt expense. This area of tax law is complicated, and you may benefit from consulting with a tax professional to determine when unpaid rent can be treated as a worthless debt.
The coronavirus pandemic has likely had an impact on your rental real estate properties in ways not previously anticipated. While we are uncertain of what the future holds with the current pandemic, there are some relief options that you can take advantage of now.
If you have tax-related legal questions about your rental property, reach out to a Rocket Lawyer network attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.
