Business Management

5 High-Value Tax Deductions Real Estate Investors Shouldn’t Miss

Expertise: Landlording & Rental Properties, Real Estate Investing Basics, Personal Finance, Real Estate News & Commentary, Business Management, Real Estate Deal Analysis & Advice, Real Estate Marketing, Mortgages & Creative Financing
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Investing in real estate can be a great way to make some extra money or even support your long-term financial well-being into retirement, but it’s also a costly venture. Those in the know, however, understand that they can offset many of expenses associated with real estate investing through tax deductions. From mortgage interest to repairs, there are many accepted deductions for savvy property owners.

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Do you know what deductions you should be taking on your properties? Here are five high-value deductions you don’t want to miss out on.

5 High-Value Tax Deductions Real Estate Investors Shouldn’t Miss

1. Interest Paid on the Mortgage

Very few real estate investors have the capital on hand to purchase properties without taking out a mortgage, and you shouldn’t be penalized for that. That’s why it’s an accepted financial practice to deduct interest paid on the mortgage on your taxes. If you pay any part of the utilities for your rental properties, you can also deduct those costs.

2. Depreciation

There are two kinds of depreciation that factor into you tax deductions as a real estate investor. One form of depreciation is depreciation on the property itself.

Although properties are typically perceived as increasing in value, this is typically due to improvements expressly made by the owner. Left alone, residential properties depreciate over 27.5 years and commercial ones over 30 years. You can write off depreciation—but you’ll have to pay for some of it in the form of depreciation recapture taxes when you sell the property.

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Related: Property Depreciation: Why the Tax Benefits Could Come Back to Bite You

The other form of depreciation that impacts property owners is less significant, but it’s still a write-off. This is depreciation affecting major purchases made to run your real estate business—think computers, vehicles, and other major purchases for business use. Typically, you have the choice to write off the purchase all at once or to calculate the depreciation over several years.

3. Business Travel

Here’s the thing about traveling as a real estate owner. There are some forms of travel that are relevant write-offs and others that might be more of a stretch. In general, the rule when it comes to deductions is that all deductions have to be ordinary and necessary for your business. Thus, something that constitutes a standard deduction in one field might not be acceptable in another.

Turning to the topic of travel, then, it would be considered ordinary and necessary to deduct travel to and from properties. This is a vital part of managing them—it’s the cost of doing business, and your taxes should reflect that. On the other hand, traveling to a conference that’s only tangentially related to your work but feeds a particular curiosity or a separate idea for a non-existent business wouldn’t make the cut according to the IRS. Interest isn’t cause enough.

4. Repairs

Unsurprisingly, repairs are absolutely classed as ordinary and necessary expenses in the world of real estate. As such, you can deduct the cost of any repairs and improvements you make to properties.

In one way, it’s interesting that you can write off not-quite-necessary improvements; you can deduct the cost of adding a room or installing a pool at a property, for example. This may seem above and beyond compared to repairing damages or even replacing out of date appliances.

At the same time, performing upgrades and renovations contributes to the increased value of your business, so it’s really just the cost of doing business in a competitive marketplace.

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Related: Why Investing in Real Estate Just for the Tax Breaks Can Be Unwise (& Downright Dangerous)

5. Legal Expenses

Finally, you can deduct any legal expenses you incur as part of managing your real estate investments—and we don’t just mean getting contracts drawn up. If you spend enough time dealing with properties, you’re eventually going to come up against some pretty tricky figures, whether it’s downright property thieves or simply tenants who fall behind on rent and drag out the eviction process. Writing off the costs of dealing with these issues won’t make them less painful, but it’s a small bit of relief.

Real estate investing isn’t an easy business. It takes significant capital, a lot of research, and continuous diligence to deal with both the property and the other people involved. Cut yourself a (financial) break along the way and make sure you’re claiming all your tax write-offs. It’s the least you can do.

Any deductions you’d add to this list?

Be sure to leave your questions and comments below!

Larry is an independent, full-time writer and consultant. His writing covers a broad range of topics including business, investment and technology. His contributions include Entrepreneur Media, TechCrunch, and Inc.com. When he is not writing, Larry assists both entrepreneurs and mid-market businesses in optimizing strategies for growth, cost cutting, and operational optimization. As an avid real estate investor, Larry cut his teeth in the early 2000s buying land and small single family properties. He has since acquired and flipped over 30 parcels and small homes across the United States. While Larry’s real estate investing experience is a side passion, he will affirm his experience and know-how in real estate investing is derived more from his failures than his successes.

    Cindy Larsen Rental Property Investor from Lakewood, WA
    Replied over 2 years ago
    Great advice for newer investors. Other decustions (not a complete list) are – property taxes – insurance – accounting and tax prep, including tax software, accounting software, or hiring out these activities – any landlord paid utilities – maintenance such as periodic yard maintenance, recoating exterior stain, yearly chimneyinspection and cleaning, or anything else you do as preventative maintainence. Preventative maintenance can be cheaoer than repairs resulting from defered maintainence, and not all tenants can be trusted to do good maintenance – any capex items which, taken as individual purchases, cost less than $2,500 can be depreciated in the year the expenditure is made: new water heater, washer/dryer, faucets, material costs for tile or hardwood flooring that you install yourself, for example. This allows you to expense small remodeling projects in the year you pay for them instead of depreciating them over 5 year, 7 year, or 10 years, etc. See https://www.irs.gov/uac/newsroom/for-small-businesses-irs-raises-tangible-property-expensing-threshold-to-2-500-simplifies-filing-and-recordkeeping. Since your purchase is less than $2,500, you can then take it as a deduction on that year’s taxes. Saves a lot of accounting paperwork.
    Kris Patel Investor from Arroyo Grande, California
    Replied over 2 years ago
    Depreciation for Commercial property is 39 yrs, not 30.
    Ben T. Wallace Contractor from Birmingham, Alabama
    Replied over 2 years ago
    How are you getting to take advantage of the deductions if your personal income is above $150k?
    Brandon Hall CPA from Raleigh, NC
    Replied about 2 years ago
    Not sure if the author will reply, but if your income is over $150k, you can still write off all of these deductions, but any taxable loss will be suspended and carried forward to future years.
    Richard Hanner from Woodbridge, California
    Replied about 2 years ago
    With income over $150k, do you have to file as a real estate professional to write off deductions? Or … ? Thought deductibility tapered steadily after $100k and ended at $150k. Thanks for your expertise; much appreciated.
    Christian Abella Investor from Virginia beach, VA
    Replied about 2 years ago
    I thought improvements have to be capitalized unless you can do section 179 depreciation? But then again I guess you can do it on the same year.
    Brandon Hall CPA from Raleigh, NC
    Replied about 2 years ago
    Improvements costing over $2500 generally must be capitalized. You cannot use Section 179 for property placed in your rental unit. Landlords can only use Section 179 for equipment (think vehicles, construction equipment, computers, etc).
    Brandon Hall CPA from Raleigh, NC
    Replied about 2 years ago
    You cannot deduct the cost of installing a pool. The cost is capitalized as a land improvement and depreciated over 15 years. You can only deduct repairs if the repair expense was less than $2,500 AND the repair does not materially improve the Unit of Property being repaired. I believe some clarification is needed here less new readers get the wrong idea…
    Shawn C. Investor from Austin, TX
    Replied about 2 years ago
    Thank you for this article, I really enjoyed it.