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

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

4 min read
Amanda Han

Amanda Han has been a CPA specializing in tax strategies for real estate, self-directed investing, and individual tax planning for over 18 years. She’s been investing in real estate herself for over 10 years with a focus on long-term hold residential and multifamily assets across multiple states.

Experience
As both a tax strategist and real estate investor, Amanda combines her passion of real estate investing with her expertise in tax. Her goal is to help investors with strategies designed to supercharge their wealth-building using entity structuring, self-directed investing, and income offset opportunities to keep more of what they make.

Her highly rated book Tax Strategies for the Savvy Real Estate Investor is amongst Amazon’s bestseller list. Amanda is also a frequent contributor, speaker, and educator to some of the nation’s top investment and self-directed IRA companies.

Amanda and her husband Matt MacFarland have a passion for animals and founded Animals for Armed Forces, a non-profit organization that has helped to place over 1,800 shelter pets with forever homes.

Press
Her cutting-edge tax strategies have been featured in prominent publications, including Money Magazine, Realtor.com, and AllBusiness.com. Amanda was a speaker at “Talks at Google” that features influential thinkers and creators. Amanda has also appeared in CNBC’s Smart Money Talk Radio, as well as BiggerPockets podcasts.

She is a 40 under 40 honoree by CPA Practice Advisor, showcased amongst the best and brightest talent in the accounting profession. Her firm Keystone CPA, Inc. was awarded a two-time winner of the Top CPA of Orange County Award by OC Metro Magazine.

Accreditations
She is certified by the CA State Board of Accountancy and is a member of the prestigious American Institute of Certified Public Accountants (AICPA) with clients across the nation.

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KeystoneCPA.com

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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!