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Top Ten Income Tax Benefits For Real Estate Investors

by Kevin Perk on April 15, 2013 · 19 comments

  
Tax

It is tax day, April 15th.  A good time to remind people that it is not about what you make, it is about what you get to keep.

One of the best things about being a real estate investor is the many federal income tax advantages that are available.  Real estate investing lets you keep more of what you make.  Here are my top ten ways real estate can help you keep more.

Income Tax Benefits For Real Estate Investors

  • Depreciation – This tax deduction lets you depreciate your real estate buildings.   Every year for 27.5 years you get a deduction just for owning real estate.
  • More Depreciation – Not only can you depreciate the buildings, you can also depreciate the parts that make them habitable.  Things like HVAC equipment, hot water heaters, plumbing and light fixtures.  These fixtures also depreciate at a faster (and thus higher) rate.  Leading to even more and higher deductions from your income.
  • Taxes/Insurance/Utilities – You can deduct all of those real estate tax, insurance and utility charges you have already paid.
  • Repairs – Repairs and supplies needed for repairs and upkeep are deductible.
  • Commissions – Commissions paid to management companies or professional fees to accountants to do your taxes are also deductible.
  • Home Office – If you work from your home, you can take the home office deduction.  This means you can deduct that portion of your home’s expense, such as mortgage payments, tax and insurance, utility payments, etc., related to your home office.
  • Office Deductions – Office supplies and equipment are deductible.   Use your cell phone for business? It may be deductible as may your computer, printer, paper for the printer, envelopes, stamps.  You get the picture.  If it is related to your real estate business, it may be deductible.
  • Business Expenses – Subscriptions, dues and fees are deductible.  You use the internet to search for real estate listings and information right?  You read the local paper to keep up with local real estate events and sales right?  All are deductible.  Are you a realtor?  Do you belong to professional organizations like a local REIA group?  Do you go to seminars to learn new real estate techniques?  All are likely deductible.
  • Mileage – Mileage in your personal vehicle is deductible.  Just keep a log of the miles driven related to your real estate activities and the savings can really add up.
  • Qualified Real Estate Professional – If you are a qualified real estate professional, there really is no limit to the deductions.  Go full time to take full advantage of this.

Related: 10 Last Minute Tax Deductions For Real Estate Investors

Here is the best part: all of the above are before you take your exemptions and standard deduction from your gross income.

So before you sign your 1040 form this tax day, use these deductions to make the tax bite a bit more bearable.  Be sure to check with your tax advisor to keep things on the up and up.  Let me know if I missed anything with your comments.

Photo: Dave Dugdale

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{ 19 comments… read them below or add one }

Curt April 15, 2013 at 1:56 pm

Ever hear of taking in private funding to fund a deal and the JV agreement transfers the tax advantages to the money partner, even though he’s not on title?

I’m trying to track down if this distant recollection has any fact to it.

curt

Reply

Ben Leybovich April 15, 2013 at 2:21 pm

Within a partnership it is possible to allocate depreciation in any way desirable. But all have to be principals in a deal.

Reply

Kevin Perk April 15, 2013 at 9:13 pm

Curt,

I have not heard of such a thing, but that does not mean it does not exist or is not possible.

Ben,

Thanks for helping out.

Kevin

Reply

Ben Leybovich April 15, 2013 at 2:29 pm

Kevin,

Point taken, but if you really think about it depreciation is really not as “great” . I just replaced flooring in a unit – $2,300. Replaced 32 squares of shingles – $5,200 or so. It would sure be nice to get the deduction now. I spent the money, didn’t I? But no – I will have to wait for at least 7 years. Sure, better this way than nothing at all, but not so great if you think about it.

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Kevin Perk April 15, 2013 at 9:15 pm

Ben,

I am with you! I had to repair a $9,000 severely leaking roof once. Nope, not a repair, but a capital expense.

At least we can recoup over the years,

Thanks for reading and commenting,

Kevin

Reply

Jeff Brown April 15, 2013 at 4:33 pm

Hey Guys — The use of ‘cost segregation’ is being touted, a strategy that can produce astounding benefits. Most are unaware they can go back a few years, sometimes more than a few, and take that approach. Just food for thought. Good stuff, Kevin.

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Kevin Perk April 15, 2013 at 9:16 pm

Thanks Jeff,

Good info to know.

Kevin

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Anthony Sera April 15, 2013 at 8:14 pm

Thanks for the article. Wish the $150k cap for non-real estate professionals didn’t exist since that takes away many of the tax benefits of being able to offset your regular income with these breaks (for us part time RE guys with full time jobs of course). I guess I should be thankful that these breaks allow you to not show a huge profit on our long term hold properties which means more tax.

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Kevin Perk April 15, 2013 at 9:17 pm

Anthony,

I hear you. Being a real estate professional has some real tax advantages.

Thanks for reading and commenting,

Kevin

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Greg April 16, 2013 at 8:00 am

Well, there are actually pros and cons to the $150K limit. If you hit the limit and can no longer use your depreciation, you get to carry it forward until you can. It’s possible to carry it forward to the point of offsetting taxes when you sell the property, which can zero out the need for a 1031.

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Anthony Sera April 16, 2013 at 8:29 pm

Greg – You know, I never did view the deferred “losses” as an alternative 1031 type of strategy. I’m in buy and hold mode with the three properties I own, I didn’t think of the advantages of carrying the losses (not being subject to the time pressures of 1031′s for example) if I ever decide to trade up. Thanks for commenting, it changed my perspective a bit to be more aggressive in really going after those deductions………

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Kevin Perk April 18, 2013 at 10:28 pm

Greg,

Thanks for reading and posting helpful advice.

Kevin

Reply

Ali Boone April 17, 2013 at 4:27 pm

Tax benefits…one of my favorite perks to rentals! Great article, Kevin.

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Kevin Perk April 17, 2013 at 9:07 pm

Ali,

I see what you did there :)

Thanks for reading and the comment,

Kevin

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Robert Steele April 18, 2013 at 10:49 am

Careful with the home office deduction. It is a big red flag for audits. Plus you don’t really get that much. I calculated something like a couple hundred a year. Then you have to jump through hoops if you ever sell your house.

The biggest tax advantage on the horizon allows you to expense big ticket items like your old roof if you replace it where as before you had to continue depreciating it. Making this election don’t become mandatory until 2014 but they are available from 2012 if you want to use them. Most CPA’s have no idea about them.

http://www.irs.gov/irb/2012-14_IRB/ar05.html
http://www.irs.gov/pub/irs-drop/n-12-73.pdf
http://www.gpo.gov/fdsys/pkg/CFR-2012-title26-vol2/pdf/CFR-2012-title26-vol2-sec1-168i-8T.pdf
http://www.bigtrucktv.com/robmoseley/new-tangible-personal-property-regulations

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Greg April 18, 2013 at 12:00 pm

Interesting info on the home office deduction. I did a little extra research, and according to some circulating opinions among CPAs, the “red flag” nature appears to be dropping. In fact, I found one IRS article that shows new, simplified rules coming out when it’s time to file taxes next year. Essentially, they had added the option for $5/sq. ft, max $1500 in lieu of the complex, receipt-based approach.

But the other article I read showed some clear distinctions that would not qualify. Definitely something to investigate and decide if it’s worth it.

http://www.irs.gov/uac/Newsroom/Simplified-Option-for-Claiming-Home-Office-Deduction-Starting-This-Year

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Kevin Perk April 18, 2013 at 10:31 pm

Robert and Greg,

My accountant also states that the “red flag’ nature of this deduction has decreased significantly in recent years due to some court decisions that went against the IRS.

Thanks to both of you for some good info on a complicated topic,

Kevin

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J. Moss April 18, 2013 at 11:35 am

Great information on using the loss carryforward to offset the capital gain on the sale. I’ll definitely keep that in mind.

Are there any other ways to navigate the $150K income limit? I currently only have two properties, and this has become an issue after getting married. Would forming an LLC allow me to claim the losses immediately, and would it be worth the time and effort to set it up at this stage with only 2 properties?

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Kevin Perk April 18, 2013 at 10:37 pm

J.

I do not think forming an LLC would give you any great tax benefits. An LLC is essentially a pass through entity, meaning any losses or gains pass through to your personal 1040. Also, I am not sure it would be worth the hassle for two properties.

I do not know of any ways to navigate the limit. The IRS is pretty specific about who is and who is not a real estate professional.

But please understand that I am a real estate investor who knows a little bit about taxes. I am not a tax expert. So please consult with someone more knowledgeable than I on these matters.

Perhaps some other readers have some insights they could share.

Thanks for reading and commenting,

Kevin

Reply

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