What Can I Deduct? The Answer That Will Save You on Real Estate Taxes

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I have never met anyone who tells me “Amanda, I think I should be paying more taxes.” Let’s face it, we all feel that we overpay in our taxes. Most people not only feel they have been overpaying in their taxes, but they feel helpless in not knowing what can be done to change the situation.

Now, I am not going to turn this blog into a sales pitch about how you need to hire a wonderful CPA (like myself) or that you need to spend a ton of money to attend seminars to learn the latest in tax strategies. What I want to focus my blog on this week is really just the simplest and most basic information we need to understand in order to maximize our tax savings which is:

Understanding What is Tax Deductible

There are countless times when I meet with new investors or new clients who are frustrated because they feel they have never been advised by their CPA on what they can write off. So what can we write off on our tax return as real estate investors?

Related: Investors Beware: 8 Warning Signs You May be Overpaying Your Taxes

The truth is, that is not a simple question to answer because what you can write off can potentially be very different than that of an investor sitting right next to you. But to start off on the right track, it is important to understand the two basic rules of what qualifies as a tax deduction. The IRS simplifies this down to two requirements:

Ordinary and Necessary

Unlike most other things in the tax world which are needlessly complex, these two requirements are actually quite simple and really mean just what you would expect.

An ordinary expense is one that would ordinarily be expected in your particular business activity. For example, for a rehabber, a work truck would be an ordinary expense. For a landlord, utilities and management fees may be common examples of ordinary expenses. What would not be an ordinary expense for a rehabber or flipper would be the costs to get your facial or hair done (this is of course assuming that you are not the star of a house flipping realty TV show).

A necessary expense is one that would be needed in order for you to generate a profit in the business. A good example of a necessary expense would be travel costs and overnight hotel for you to visit an out of town rental. If you are in the rehab business, marketing costs would be an example of a necessary expense to help you find a property or sell a property.

The Answer

So the answer to the age old question of “what can I deduct on my tax return?” is whatever expenses you have incurred that is both ordinary and necessary to your business.

Related: I Like Paying My Taxes (You Might, Too, After Reading This!)

Now I know that most people who are not CPAs do not walk around all day thinking about taxes or ways to write off certain things on their tax returns. But in all seriousness, taking taxes into consideration when making large purchase decisions or life decisions can often pay off in the long run. A good habit to develop is to always keep taxes in the back of your mind.

For example, when you are looking to purchase a laptop next time, think about whether the laptop can be something that is an ordinary and necessary expense to your real estate business. Or if you will be going on a trip soon, think about whether you can put some things in place to make your trip an ordinary and necessary part of your investment business.  Be sure to read our article Strategies to Make Your Summer Vacation a Tax Write Off for more details on writing off travel costs.

So why exactly did I say that an item may be tax deductible to you but not to the next investor? Well, what is an ordinary and necessary expense to you may not be ordinary and necessary for someone else. A perfect example of this would be the ability to deduct a girlfriend — yes, I said girlfriend!

If you are just a normal person who is spending a lot of money on your girlfriend to buy her purses and take her out to nice dinners without any real estate related activities, odds are that the money spent on your girlfriend is not tax deductible. But believe it or not, the US Tax Court has actually allowed a real estate investor to take a tax deduction for his girlfriend. So what exactly is the story all about? Well, here goes…

The Tax Deductible Girlfriend

A real estate investor (who shall remain nameless) who owned a handful of rental properties enjoyed spending time with his girlfriend so much that he decided they should work together. Rather than showering her with rare diamonds and gems, they agreed that cash was king. This savvy investor was someone who was always looking for ways to reduce his taxes so what he did was to have the IRS help him pay for part of his girlfriend.

In order to make that happen, he legitimately hired his girlfriend to help him out with his rental properties. She was hired to help manage his rentals, pick up rent checks, furnish his properties, as well as help him out as an assistant. Because these were ordinary and necessary expenses for his real estate business, the IRS had to allow this investor to write off the money spent.

What about the fact that the money was paid to his girlfriend, someone he enjoyed spending time with? Well, that didn’t change the fact that having an assistant to help you manage properties is an ordinary and necessary expense. Thankfully for this investor, he was happy, his girlfriend was happy, and his wallet was happy as well.

The person that was not so happy? His wife.

Ok, this part I just made up. I don’t believe he had a wife. Who knows, maybe this girlfriend eventually became his wife.

The moral of this story is that in order to maximize your tax savings, make sure you keep taxes in the back of your mind and when spending money, and always ask yourself whether something can be an ordinary and necessary expense to your real estate business. When in doubt, call your tax advisor and get them to help you plan strategically.

How often do you think about your taxes when it comes to your real estate business?

We’d love to hear from you in the comments!

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About Author

Amanda Han of Keystone CPA is a tax strategist who specializes in creating cutting-edge tax saving strategies for real estate investors. As real estate investors herself, Amanda has an in-depth understanding of the various aspects of investing including taxation, self-directed investing, entity structuring, and money-raising.

13 Comments

  1. Ha, Ha! All of that serious deduction talk and then WHAM … “everyone was happy except his wife.” Very funny, Amanda. Thanks for the good fundamental info and thanks for the humor. I can always use some back to basics on saving money with taxes.

  2. Have thought about the girlfriend expense quite often. She does help me pretty often. I think she is in a higher tax bracket though so it would not make much sense when she claimed it, right?

    Is there an amount she can earn without claiming it? $600 comes to mind.

    • Jeff: That is correct…if girlfriend is in higher tax bracket then it generally does not make sense to shift income using this example. With respect to paying taxes…all income earned regardless of amount should generally be reported. The $600 you are referring to is with respect to issuing 1099’s (ie if paying someones less than $600 then no 1099 is required). However on the recipient’s end, they are technically required to report any and all income earned regardless of amount.

  3. Thank you Amanda about the girlfriend. My second question is in regards to the computer you mentioned. My computer is getting tired and is locking up regularly. When I buy a new one (soon) does it matter if I use it for personal and RE? Would it then be 1/2 deductible or 100% since it is necessary (tenants contact me email etc) to conduct my business?

    Great timing on your post since both things on my mind. Thanks again.

  4. I too appreciated the wife joke.

    Back to business… (Since if I don’t do some business I can’t count the time I used to read and comment on this article towards my hours to qualify as a real estate professional :) )

    Did the investor who hired his girlfriend really just make her an employee or did he push the envelope any more? Did they have a standing “business meeting” on the weekend where he would deduct the meal, and of course the mileage to drive there? Did she get a company clothing allowance? Was it necessary to provide her with a vehicle to perform her offsite management duties?
    Not at all advocating doing anything shady, but looking into what has to be done to legitimately get to take deductions for things that you will spend personal funds on otherwise.

    • I can always count on Shaun to come up with the good questions. I cant speak specifically for this court case in terms of what other items were deducted but here are my comments as it relates to business expenses in general:

      1. Employee v Contractor: this depends on the nature of the work involved as the IRS has regulation on when must someone be treated as an employee. There are loopholes of course and I also wrote an article about the rules, etc. on BP…I am not savvy enough to link but I am sure you can find it on BP =)

      2. Business meetings, meals, car expenses: The fact that it is a girlfriend who works for you does not matter…..you just need to meet the usual ordinary and necessary requirement of the IRS.

      3. Company clothing is deductible if it has company logo and/or is a uniform.

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