Property Management & Rentals

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:

Repairs 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.

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:

• 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 wall
• 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
• Ductwork
• 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, ductwork

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, and
• 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 improvements

   However, 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

   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 to routine maintenance: the ten-year rule and the no betterments rule.

   • The Ten-Year RuleMaintenance 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.
   • No Betterments or RestorationsThis 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 HarborFinally, 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.

Repair Versus 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 deducting rental property repairs and improvements.

• IRS – Form 1040 Schedule E Instructions
• IRS – Form 1040 Schedule E Instructions
• IRS – A Brief Overview of Depreciation
• IRS Publication 946 – How to Depreciate a Property
• Nolo: Every Landlord’s Tax Deduction Guide

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.

The end of a lease is an important event for landlords and tenants alike.

It can also be a time of conflicting expectations.

The landlord will usually expect their property to be returned to them in the exact condition that it was in when the tenants moved in –and if this doesn’t happen, are often happy to use the tenant’s security deposit to make it this way. Tenants, on the other hand, more often than not will expect their full security deposit back, even if there has been some damage to the rental.

In order to help manage expectations, and make the move-out process as simple and straightforward as possible, it’s important for both landlords and tenants to be on the same page. This includes having a good understanding of security deposits, and what they can and cannot be used for.

At the Time of Move-Out

At the time of move-out, the landlord or property manager is responsible for repairing any damages to the property, as well as assessing and documenting normal wear and tear. A good Property Manager will have a move-out routine that includes items like:

• Making sure the property is clean
• Replace all furnace filters
• Check smoke and CO detectors are in good working order
• Replace burnt-out lightbulbs
• etc…

They’re also responsible for deciding who will pay for any repairs, maintenance, and cleaning that’s required to bring the property back into rentable condition.

This is the part of the process that’s often full of contention. When it comes to assessing damages, the landlord’s job is to assess the property and determine what falls under the category of damages, and what should be considered simply normal wear and tear. While damages are the tenant’s responsibility, things that fall under the category of normal wear, should not be taken out of the security deposit.

It’s important that landlords not use the security deposit to pay for things that go above and beyond the scope of normal wear. They may attempt to use it for things like worn carpeting or faded paint on the walls, things that aren’t damages, but instead are just the result of normal usage. In most cases, landlords know to use the security deposit as intended, to repair damages to the property, only for the tenant to contest this, and seek to get it back. One important exception to this rule pertains to items spelled out in the lease. Examples might be cleaning or carpet cleaning. If these items are stipulated as tenant responsibility in the lease, the landlord is within their rights to use security deposit funds to pay for them, if the tenant left these items undone.

When it comes to repairs, though, the law stipulates that the security deposit should only be used for repairs to damage that goes beyond what’s considered to be ordinary wear and tear.

Colorado Law (C.R.S. 38-12-102) defines “normal wear and tear as “Deterioration which occurs, based upon the use for which the rental unit is intended, without negligence, carelessness, accident, or abuse of the premises or equipment or chattels by the tenant or members of his household, or their invitees or guests.”

That’s a bit confusing for landlords and tenants alike. To help clear things up, here’s a list of examples of both normal wear and tear and damage.

When determining costs, the landlord will also make decisions about repairing versus actual replacement. In some cases, repair is the best choice. A good example of this would be a recent experience we had. A tenant had backed a car into the side of a home damaging a section of masonite siding. The siding was already in rough shape and the product was failing and the particular pattern was no longer available. The owner was planning to reclad the home in stucco in a couple of years anyway, so we just applied a patch using every the favorite body putty of every motorhead, “Bondo”.

This repair worked out well because the owner already had a plan in place for new exterior stucco and was willing to kick the can down the road. Had this not been the case, the repair could have cost the tenant a lot more money. It’s important to note that in some cases, a landlord may charge a replacement cost for an item that could be repaired with a short-term fix. So, for example, suppose a tenant punches a large hole in a wall. The landlord may choose to repair it in the short-term by simply patching it. While this temporary fix is fine for the short-term, the underlying fact is the wallboard is not the same, and the owner may choose to go back at some point and replace the entire wallboard so they are within their rights to charge for replacement.

Calculating Repairs Cost

If the item can be repaired, though, in most cases the landlord will choose to go that route. In this case, the landlord will deduct for labor, materials, and travel.

• Calculating Average Repair Costs-It’s also important for the landlord to determine material and labor costs based off of averages. This will help to avoid conflicts, and in the event of litigation, the courts will also require a list of repairs, and having average costs will make it easier to prove your case.
• Factoring in Depreciation-Depreciation also factors into how much the tenant ends up being charged for damages. Depreciation takes into account the fact that things have a life expectancy. This includes carpet, appliances, paint, tile, and more. This life expectancy needs to be factored into the cost of repairs or replacement.

For example: if a five-year-old carpet is destroyed and that particular type of carpeting had a 10-year life expectancy, the landlord may only charge the tenant 50% of the replacement cost. This is a good practice, and extremely important as it helps to prevent landlords from using deposit funds in order to upgrade their properties.

These are estimates are produced by HUD. Manufacturer estimates will vary.

Assessing the Condition of the Property

Assessing the condition of the property is the responsibility of the landlord or property manager.

This will allow the landlord to determine whether there are any damages that are the tenant’s responsibility, and therefore should be paid for out of the security deposit. It also allows them to set the condition baseline before a new tenant moves in.

The challenge is determining and documenting the condition of the property before the damage occurred. This is important in the event that the tenant disputes the damages, or if the case goes to court, as having proof that the affected or damaged area was in good condition before will generally resolve the issue.

Documentation Methods Include:

• Written Reports: Written reports are an old method, but one that’s still in use today. With a written report, the landlord or property manager does a walk-through of the property and takes notes on its condition. Relying solely on written reports isn’t the best option, since it can be subjective, and doesn’t really provide much proof of the condition one way or the other. In most cases, property managers and landlords would be better served by using another form of documentation in addition to, or instead of a written report.
• Apps: Some landlords prefer to use an app that prompts them for pictures and notes. Although this certainly is a step above the old-fashioned written report, in that it makes it easy to capture images and notes to go along with your report, in some cases, they just aren’t thorough enough.
• Video: Video footage is an especially good method of documentation. To capture video footage, the landlord or property manager will perform a walk-through inspection of the home with a video recorder or phone, compiling a detailed video of the condition of the unit. However, this method can be problematic. When it comes to finding the affected item in question, having video footage means that the landlord will have to fast forward and rewind through quite a bit of footage. This can be time-consuming and uncomfortable in court. Just imagine fast forwarding and rewinding while the judge waits! Of course, you could capture image stills before you go to court, but again, this could be a time-consuming process.
• Pictures: Taking photos is one of the best ways to document the condition of a property. And it’s especially affordable since the advent of digital photography and affordable storage options. You can take hundreds of pictures of a property and if there’s damage, it’s fairly easy to go back and find the photograph that references the newly-damaged area. If you choose this method, just make sure you use your digital camera’s time and date stamp feature.
• 3D Imagery: Another new method for documenting the condition of a property, using 3D photography like the Matterport 3D camera allows landlords to do realistic virtual walkthroughs on properties. Since the footage is stored in the cloud, you can use the mouse to walk right up to the area that’s damaged and check to see what the condition was prior to their move-in. You can also take additional pictures inside cabinets, closets, and other places the camera can’t see. A secondary benefit from these tours is showing prospective tenants –especially out-of-state applicants, the property before they agree to lease it.

Tenant Should Protect Themselves

Of course, there’s a lot that tenants can do to help ensure that they’ll get their deposit back at the end of their lease.

First, of course, tenants should ensure that they keep the property in good condition while they live there, and avoid anything that might cause damage to it.

Secondly, if a tenant would like to contest the landlord’s decision to apply the security deposit to damage, they can do so. The best way to do this is by being able to furnish proof of the condition of the property. In most cases, tenants should consider taking their own photos. Generally speaking, the more documentation, the better. Photos that are taken at the time of move-in could provide proof of the condition of the property, and images that are obtained, say; a month into the lease could be used as proof of damage caused by movers. It’s also a good idea to use a camera with a time and date stamp feature and to show any pictures of post-move-in damage to the landlord.

It’s also worth noting that if a landlord fails to follow Colorado security deposit laws, the tenant could be awarded up to three times the amount that was wrongfully withheld, plus attorney’s fees and court costs, so it’s important for landlords to ensure that they remain in compliance with the law, and handle the security deposit properly.

Being Clear on the Terms of the Lease

For tenants, it’s important to remember that normal wear and tear versus damage are broad definitions, and much of the detail about the condition that you’re required to leave the property in at move-out will be specified out in your lease.

It’s important to read the lease before signing it and to make sure you ask questions to ensure that you’re clear on what’s expected of you. For instance, in some cases a landlord may state that the carpets are to be professionally cleaned at the time of move-out, others will require you to perform regular, outdoor grounds keeping maintenance, so make sure you fully understand your responsibilities and requirements before you move in.

Successful and straightforward move-outs are always the result of good documentation and communication, from both parties. It’s important for landlords to spell out their expectations in the lease document, and for tenants to ensure that they’ve read the lease –and are clear on their responsibilities both in terms of maintenance, and the condition that they’re expected to leave the property in at the time of move-out.

 Additional Resources:

• Wendy Weir-Renting vs Buying, Weigh Your Options
• Michelle Gibson-Why Should a Wellington Landlord Pick You?
• Anita Clark-Should I Sell or Rent My Home?

For most landlords, being able to deduct operating expenses can make a big difference on the amount of tax that they owe.

But when it comes to fully utilizing those deductions, that’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.

Deductions: Current Vs. Capital

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

Let’s look at both now.

• 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 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 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 deductions, and the rules surrounding them, visit the IRS Publication 463: Travel, Entertainment, Gift, and Car Expenses.

Get Organized

Okay –so you have a lot of deductions that you can work with now. 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.

So there you have it! 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.

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.

The 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 the 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, the 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 DepositsSecurity 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 DepositsAny 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 PaymentsAny 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 RentProperty or services that you receive from a tenant as rent must also be included as rental income.
• Rental Expenses Paid for by TenantAny 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 TenantAny 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 CancellationsPayments for lease cancellations are also considered rental income.
• Leases With an Option to BuyIf 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.

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:

• Mortgage Interest
• Interest on Other Loans
• Depreciation
• Repairs and Maintenance
• Professional Services
• Insurance
• Advertising
• City and State Taxes
• Utilities
• Travel Costs
• Losses
• Operating Expenses

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 your rents that you’re charging 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 tax deductions listed above, however, if your rentals are considered an investment –you’ll lose certain deductions. Of course, 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 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 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.

You vetted the tenant –as carefully as possible.

You pulled credit reports, did a background check, verified their job, and called their previous landlords to make sure everything checked out.

At first, they may have been an ideal tenant; paying the rent on time, and rarely causing problems.

But somewhere along the way, something changed and a tenant that was once considered qualified –is no longer abiding by the terms of the lease.

In most cases, this violation comes in the form of late rent. Maybe they’re having trouble paying due to a job loss that results in a sudden loss of income, or income being cut in half due to a divorce. Other times, lease violations involve a tenant moving a new roommate in, without seeking permission first; or even adopting an undisclosed pet or two, and bringing them into your ‘no pets’ rental. Sometimes, there may be more serious issues involved; such as drug-related activity or criminal activity.

The fact is that even the most carefully vetted tenant, can sometimes slip through the cracks. And things come up that can transform even the most ideal renter into one who’s in violation of the lease.

No matter what the issue is, for landlords, it’s extremely important to ensure that you take action as soon as possible, to help prevent the problem from compounding or getting worse. Once a tenant falls too far behind on the rent, it can be all but impossible for them to get caught up. It may seem like an insignificant detail, but for many landlords who depend on rental income, a tenant who falls one month –or longer behind on the rent, can represent a serious loss.

For tenants who may be violating the lease in other ways, such as moving pets in without permission, taking action to address the issue sends the message that you care about your rental, and expect all of the residents to abide by the rules. Letting things “just slide” for too long can lead to complacency and the start of a downward spiral.

If you’ve reached the point of no return, where a tenant who is in violation of the lease isn’t complying with your warnings, the next step is usually to begin the eviction proceedings.

Notice of Termination With Cause

For a landlord to evict a tenant in Colorado before the tenant’s rental term has expired, they must have a legal cause. Colorado law defines legal cause as:

• Failing to pay rent
• Violating the lease
• Committing a serious act, such as a crime

The first step in this process involves giving the tenant a 3-day notice. This notice states your intention to evict the tenant and informs them that they have three days to fix the lease violation or vacate the property.

The procedure for the 3-day notice is something we discussed in detail in our previous article.

Once they’ve received the 3-day notice, the tenant usually has two options:

1. To pay rent, or remedy or, ‘cure’ the violation, or
2. Move out.

The tenant has three days to correct the problem or move, and if they fail to do so, then you may begin the eviction procedures through the court. This process can be initiated on the 4th day after the tenant receives the notice.

The Formal Eviction Procedure

If the 3-day notice doesn’t result in the tenant paying the rent, or ‘curing’ the violation –or moving out, you can then proceed with the formal eviction procedure.

This involves filling out a few forms including JDF 99, or, Complaint in Forcible Entry and Detainer, plus a CRCCP Form 1A –Summons in Forcible Entry and Unlawful Detainer, and a CRCCP Form 3 –Answer Under Simplified Civil Procedure.

Once you’ve filed the complaint with the court, you have one day to mail a copy of all of the forms to the tenants. Do this via first class mail with prepaid postage.

Next, the court clerk will schedule a hearing. This is usually between 7 and 14 days from the date that the summons is issued. However, the tenants must be given at least 7 days between the date they are formally served and the court date itself.

The summons can be issued by the sheriff’s department or a private process server –or by another adult who isn’t involved in the eviction. If the tenants cannot be served in person, the papers can be posted on the door of the rental.

After the tenants have been served, they must show up in court, or file a counterclaim to the allegations in your complaint. If you’ve filed everything correctly and the tenants do not make a counterclaim, you may receive a summary judgment in your favor.

If the Tenant Contests the Eviction

If they feel they have legal grounds, a tenant may try to contest the eviction. They could do this by filing an answer on or before the time set by the court.

Some common legal defenses that a tenant may use include claims that you failed to maintain the rental unit, or that you are retaliating against them. Fighting an eviction could increase the amount of time that the tenant is able to stay at the rental property.

If the tenant files an answer with the Justice Court, then a hearing will be scheduled. A notice of the hearing date will be mailed to all parties.

However, if the tenant fails to answer or appear on the date indicated in the eviction papers, you can obtain an eviction “Order” by default.

If the Tenant Does Not Contest the Eviction

If the judge makes a decision in your favor, you can then file for possession of the property. To do this, you’ll want to complete the Motion for Entry of Judgment (JDF 104). After reviewing it, the court will give you a signed copy of the Order for Entry of Judgment (JDF 107).

Next, the countdown begins. The tenant will have 48 hours from the date of the judgment to vacate the unit. If they don’t, then you can then complete the Writ of Restitution (JDF 103) and present it to the court.

Once the judge approves it, they’ll contact the sheriff’s department to execute it; that is, to remove the tenant.

Removal of the Tenant: What Happens if a Tenant Refuses to Leave?

If the tenant hasn’t vacated the premises, then the actual eviction will take place.

You’ll receive a time and date from the court or sheriff’s department, stating when they will arrive to execute the writ.

You can then arrange to have the tenant’s personal property removed from the rental at the date and time that you received from the court. This is generally done with the help of a local moving company. You will have one hour to remove the tenant’s belongings, so make sure you will have enough manpower available to remove everything during this time.

On the day of the eviction, the sheriff will serve the Order to the tenant and then will remain on site.

In some jurisdictions, such as El Paso County, the Sheriff will generally “Pre-Serve” the tenant by posting a notice letting the tenant know they will be back to take possession. This is done to encourage the tenant to leave instead of waiting for the eviction itself to take place.

Keep in mind that the only person who is authorized to remove a tenant from the rental unit is a law enforcement officer. A landlord must never try to force the tenant out of the unit. If you attempt to, the tenant could take legal action against you.

Neither the sheriff nor the landlord has any responsibility to safeguard the tenant’s property once it is removed. If you find that a tenant has left behind personal belongings, you aren’t required to contact the tenant before disposing of them. However, if you do decide to store them for the tenant, you can charge storage.

After the Eviction

Once the tenant has been evicted; the landlord or property manager can take steps to get the property ready to rent again.

In most cases, the first step is getting the property re-keyed.

At this point, the cleaning and repairs can commence as well. This involves a walk-through inspection of the unit, taking note of any damage that the tenant caused.

You also process the security deposit that you obtained from the tenant when they first moved in. If there is any back rent owed or damage to the rental, you can apply the security deposit to this, and send the remainder to the tenant. Keep in mind that general wear and tear is not the tenant’s responsibility, and cannot be taken out of their security deposit.

If additional back rent or money is still owed, even after the security deposit has been applied, you can start the process of seeking this as well.

While evictions can be a stressful and often-confusing time, it’s important for landlords to ensure that they follow the law to the letter. Complying with the law will help the eviction proceedings to go much more smoothly. If you were to attempt to take the law into your own hands at any point, or neglect to send out the right form, a tenant could have a reason to contest the eviction, and the judge could end up throwing your case out. In this case, you may have to start the proceedings again.

Evictions are never pleasant but they do get easier over time. Once you have a clear understanding of the law and know the steps that are required, it’ll be a lot easier to navigate the process and ensure that you do so in a way that’s in compliance with the law.

If you’re not sure where to start, you could always consult with an experienced attorney, to make sure you’re clear on what’s required of you, and what steps you should take.

Note: The information in this article is intended to inform and educate, it should not be taken as a substitute for legal counsel. If you have any questions about the eviction process or your rights as a landlord please contact an attorney.

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.

Important 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 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 Demand Notice

So let’s get down to it. Every eviction must begin with a written 3-day 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 Notice

Serving the 3-day 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. Read more about the eviction process.

While landlords are usually free to allow, or ban pets from their rentals, and are well within their rights to do so, there’s one very important exception to this rule that landlords should know about: assistance animals.

When it comes to the issue of service animals and emotional support animals (ESAs), landlords should note that these animals are exempt from no-pets policies. The reason is simple: these animals are not considered to be pets, but rather necessary aids for someone who has a disability. Because they don’t fall under the category of pets, landlords should make every effort to accommodate a reasonable request from a tenant who has a disability and allow these animals in their units. Landlords should also waive any pet rent or additional security deposits that they would normally require for pets.

When leasing their homes, some homeowners may feel concerned –that there’s room to exploit this system and attempt to smuggle pets in under the guise of service animals or emotional support animals; there’s no need for alarm. While a landlord is required to make reasonable accommodations for requests from people with disabilities, they also have rights to screen requests to ensure legitimacy.

If you’re a landlord –and wondering how you should treat requests for service animals or emotional support animals, read on. In this guide we’ll explore the difference between pets, service dogs, and emotional support animals; and see what your obligations –and rights are as a landlord.

Defining What Roles Animals Play

First, let’s look at the three different categories of animals; and see the difference between pets, service animals, and emotional support animals.

• Pets-Any domestic or tamed animal that’s kept for companionship or pleasure is considered to be a pet. Tenants with pets are not afforded any special protection under Fair Housing Guidelines, and landlords can choose whether to allow a pet in their rentals. They can also choose to implement requirements for pets –such as obedience training, up-to-date vaccinations, a clean bill of health from their veterinarian, and requiring the animal to be spayed or neutered. They can also impose breed restrictions as well as weight restrictions; such as no pets over 30 pounds. In most states, landlords can also charge a pet deposit –a form of a security deposit for a pet, as well as charge a pet rent each month. Colorado state law doesn’t have any statute on pet fees or pet deposits. If you’re outside of Colorado, though, be sure to check your own state laws before charging a pet rent or pet deposit.
• Service Animals– A service animal, under Colorado law, is a dog or even a miniature horse that has been trained to do work or perform specific tasks for a person with a disability. The most well-known form of service dog is Seeing Eye® dog, but service dogs can be trained to assist with a number of disabilities. For example, they can pull a wheelchair, alert a person before they have a seizure, or even calm a person who suffers from Post-Traumatic Stress Disorder.The definition of a service animal can apply to, but are not limited to the following:
  1. Guiding an individual who is blind or has low vision
  2. Alerting an individual who is deaf or hard of hearing to sounds
  3. Providing protection or rescue assistance
  4. Alerting an individual to impending seizures
  5. Pulling a wheelchair
  6. Fetching items
  7. Providing emotional support to a person with a disability

  The tasks a service dog can perform are not limited to this list; however, the work or task a service dog does must be directly related to the person’s disability. The Americans with Disabilities Act (ADA) states that service dogs are exempt from ‘no-pets’ policies, and may accompany a person with a disability into places that members of the public normally go, including state and local government buildings, businesses and non-profits that are open to the public, and on public transportation. Both the ADA and the Fair Housing Act require landlords to make similar accommodation for these animals, to allow them in units that have no-pets policies in place. This is something that falls under the category of reasonable accommodation, which requires landlords to make every reasonable attempt to accommodate people with disabilities. These animals are also exempt from pet deposits and pet rent, or any other pet-related fees. These animals are also excluded from any restrictions on breed and size.

• Emotional Support Animals (ESAs)-An emotional support animal is an animal, typically a dog or cat but it can include other species, which provides therapeutic benefit to its owner through companionship. The animal provides emotional support and comfort to individuals with psychiatric disabilities and other mental impairments. The main difference between a service dog and an ESA, is that while service dogs have been trained for a specific task, ESAs are not required to undergo any training at all. Unlike a service animal, an emotional support animal is not granted access to places of public accommodation. However, the federal Fair Housing Act (FHA) states that an emotional support animal is to be viewed as a “reasonable accommodation” in a housing unit that has a ‘no-pets’ rule for its residents, when an individual requires the animal in order to have an equal opportunity to use and enjoy the housing. As with service dogs, a landlord should not charge a pet deposit or pet rent for ESAs, and these animals are also excluded from breed and size restrictions.

Handling Requests for an Assistance Animal

When a landlord or housing provider receives a request for a service dog or ESA, they should ask two questions.

1. Does the person seeking to use and live with the animal have a disability — i.e., a physical or mental impairment that substantially limits one or more major life activities?
2. Does the person making the request have a disability-related need for an assistance animal? In other words, does the animal work, provide assistance, perform tasks or services for the benefit of a person with a disability, or provide emotional support that alleviates one or more of the identified symptoms or effects of a person’s disability?

A landlord is allowed to verify a tenant or applicant’s need for service dogs or emotional support animal by requiring a letter from the tenant’s doctor or licensed mental health therapist, stating their need for the animal.

However, there are two things that a landlord should avoid doing during the verification process:

1. Landlords May Not: Ask for verification when the disability is obvious In the case of a Seeing Eye® dog, for instance, the landlord should not require proof of the tenant’s disability if they are blind. For emotional support animals, or for disabilities that are not immediately obvious, a landlord can require a letter from the doctor.
2. Landlords May Not: Ask the tenant’s doctor for information about the tenant’s disability When requesting a letter from the tenant’s doctor, a landlord should take care not to ask for information relating to the tenant’s disability itself, and instead, should only ask for information regarding the tenant’s need for the animal.

The ADA states that the only two questions that may be asked are the following:

1. Is the dog a service animal required because of a disability?
2. What work or task has the dog been trained to perform?

Reasonable Accommodation

A request for a service dog or ESA is classified as a reasonable accommodation for a person with a disability. A reasonable accommodation is a change, exception, or adjustment to a rule, policy or practice used in running a community. In most cases, a landlord should be able to make accommodation for a person with a disability and allow them to have a service animal or ESA.

On the other hand, a person with a disability who makes a request for any modifications to the unit or common areas, on the other hand, is considered a reasonable modification. In these cases, the resident is usually responsible for paying for related costs. In practice, though, management may agree to some type of cost sharing with the resident as part of the interactive process expected under the Fair Housing Act.

Exceptions

There are a few exceptions to the Fair Housing Act, and some properties may be considered exempt from providing reasonable accommodation.

• A building with four or fewer units, one of which is owner-occupied
• Single-family homes where the owner does not use a real estate agent to buy or rent the property
• Housing owned by organizations or private clubs that are used for members

Tenants Are Responsible for Their Service Animal or ESA

While landlords are not able to charge a tenant who has a service animal or ESA a pet deposit or pet rent, the tenant can be held responsible for any damage that their animal causes in the unit. Additionally, a landlord can issue a warning and even evict a tenant who has a service animal or ESA if that animal poses a threat to others, disturbs the peace, or causes considerable damage. An assistant animal may not be a nuisance for other tenants.

Different State Laws

It’s important to note that some states have laws that provide broader protection than the ADA. For example, some states may offer protections to trainers of personal assistance animals as well. However, in some cases, a state may have disability discrimination laws that exclude psychiatric service dogs from protection. However, this doesn’t mean that the ADA doesn’t apply in these states. As long as federal law applies the ADA trumps more restrictive state laws.

Importance of Tenants Upholding the Law

Just as landlords must make reasonable accommodation for people with disabilities, tenants must also ensure that they abide by the law as well. Any person who misrepresents the right to an assistance animal would commit a class 2 petty offense.

Tenants Should Make the Request

In most cases, a tenant should first make the request for the animal to the landlord, before obtaining the animal. [Sample letter] While the law doesn’t require it, it’s good practice for this request to be in writing. The request should explain how the reasonable accommodation helps or mitigates symptoms of the disability. The tenant does not need to disclose the disability, but he or she will need to provide documentation from a doctor or other licensed health professional stating that the animal provides emotional support that alleviates one or more of the identified symptoms or effects of an existing disability.

While landlords are allowed to restrict or ban pets from their rentals, when it comes to service animals and ESAs, in most cases, a landlord should make every attempt to accommodate reasonable requests from tenants who have a disability. For emotional support animal requests, or requests for a service animal where the disability may not be obvious, a landlord can require a letter from the tenant’s physician or psychiatrist. If this document is produced, then in most cases, a landlord should allow the animal.

For tenants, all requests for a service animal or ESA should be made to the landlord prior to obtaining the animal. Ideally, this request should be made in writing. If the landlord requires more information on your need for the animal, this can usually be provided in the form of a letter from your doctor or licensed therapist.

Finally, if you’re a landlord who’s wondering how to handle a specific request for a service animal or ESA in your rental consider speaking with an experienced local attorney. A good attorney will be able to inform you of the best course of action for your situation, allowing you to ensure that you stay in compliance with federal, state, and local laws.

Colorado Landlords: for more information on Colorado state law, have a look at some of the landlord-tenant laws that apply to residential units.

Tenants who are looking for help making a service animal or ESA request, here is a sample request letter that you can modify and use to make a request to your landlord.