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\t\t\t<\/a>\n\t\t \n\n\t\t\n\t\tDreading tax season?<\/p>\n\n\n\n
Not sure how to maximize deductions for your real estate business? In The Book on Tax Strategies for the Savvy Real Estate Investor<\/em>, CPAs Amanda Han and Matthew MacFarland share the practical information you need to not only do your taxes this year\u2014but to also prepare an ongoing strategy that will make your next tax season that much easier.<\/p>\n\n\n\n Rental property income is considered \u201cpassive income\u201d by the IRS.<\/strong> Passive income is treated much more favorably than active income (\u201cactive income\u201d includes things like W2 income and income from flipping properties).<\/p>\n\n\n\n Residential rental property is the only investment asset that both appreciates and depreciates at the same time. <\/strong>Both put money in your pocket! Everyone is familiar with appreciation\u2014the value goes up on your property, and that increase in value is money you can keep.<\/p>\n\n\n\n Depreciation is a little trickier, but in short, the IRS assumes there will be continued wear and tear on your rental property throughout its life, and they offer you a level of compensation for that wear and tear in the form of pretty substantial write-offs. This isn’t literal wear and tear\u2014if you keep the property pristine, that doesn’t count against you. The details on the write-off are tricky, but just know that you end up writing off that amount for depreciation on your taxes, which in turn increases your return.<\/p>\n\n\n\n Now it\u2019s time for a list of things related to a rental property that can typically be written off on your taxes. The reason write offs are important is that they decrease your taxable income on the properties. The more write-offs you have, the less you have to pay in taxes.<\/p>\n\n\n\n The purpose of this list is not only to help ensure you include everything you can in your rental property write-offs, but also to alert you to how many write-offs there really are for residential rental properties in case you are shopping for investments and not completely convinced yet of how great the tax benefits of real estate investing<\/a> are.<\/p>\n\n\n\n For example, if a landlord purchases a property for $330,000 with a $265,000 loan, and the assumed estimated interest amounts to around $17,000 for the first loan year, they would be eligible for a $17,000 deduction from their rental income for that year. If their income amounts to $37,000 and they can deduct $17,000, they would only be taxed on $20,000, which makes a big financial difference.<\/p>\n\n\n\n A landlord can deduct state, local, or foreign property tax from their federal income taxes. However, the 2018 Tax Cuts and Jobs Act (TCJA) put a cap of $10,000 or $5,000 if married filing separately on this deduction.<\/p>\n\n\n\n These deductions are comprised of the ongoing expenses of running a rental property. Here are a few examples:<\/p>\n\n\n\n How cool is it that you can deduct an expense you haven\u2019t actually spent any money on? The IRS lets you depreciate the value of your rental structure over the course of 27.5 years. You take the estimated worth of your rental structure (land not included) and divide it by 27.5, which gives you the amount for your annual depreciation deduction.<\/p>\n\n\n\n However, you need to know that if you sell the property for profit price, you may be responsible for all or some of the money written off for depreciation.<\/p>\n\n\n\n Landlords may claim repairs as a tax deduction. These are categorized as fixes made to a property to make it habitable.<\/p>\n\n\n\n Improvements, however, are not included in \u201crepairs.\u201d Anything that adds value to a property or extends its life is considered an \u201cimprovement.\u201d These would be fall under \u201ccapital expenses,\u201d which must be capitalized as a long-term asset and depreciated over many years.<\/p>\n\n\n\n The IRS<\/a> dictates that these expenses are \u201cthose that are common and generally accepted\u201d within an industry. For example, a landlord could deduct the payment made to a contractor who had to replace a leaking roof.<\/p>\n\n\n\n The IRS mentions anything \u201cdeemed appropriate\u201d or helpful can be deducted by a landlord. For example, the purchase of online education tools or business management tools would be included. Here\u2019s a short list of some additional items deemed \u201cnecessary.”<\/p>\n\n\n\n These deductions not only include the home office space but also workshops and office expenses.<\/p>\n\n\n\n Company fees are considered an administrative expense and can be fully written off.<\/p>\n\n\n\n Evictions are expensive, but a landlord can deduct court fees and legal fees in these situations. Additionally, any professional fees or services such as accounting, real estate agent, attorney, and bookkeeping can be deducted.<\/p>\n\n\n\n Side note: Remember that legally you are required to pay taxes on the rent garnered from your tenants.<\/p>\n\n\n\n If your rental properties belong to a homeowner\u2019s association, then you are responsible for paying dues. Since they fall under the category of \u201cnecessary expenses,\u201d you are allowed to deduct them against your rental income.<\/p>\n\n\n\n As a landlord, you are responsible for maintaining habitable conditions for your rental properties. Fortunately, you can deduct any expenses for pest control since it falls under necessary expenses.<\/p>\n\n\n\n In order to legally operate, small business professionals are required to pay for numerous licenses and permits. The good news is these can be expensed on your income tax.<\/p>\n\n\n\n It may seem small and meticulous, but the little things add up. As a landlord, if you send notification letters, maintenance letters, or checks sent to tenants by way of USPS certified mail, the postage, envelopes, and letter supplies are tax-deductible.<\/p>\n\n\n\n There are two ways to approach vehicle\/travel deductions.<\/p>\n\n\n\n Expenses accrued from renting or buying equipment or tools can be deducted from your income tax. Some examples include:<\/p>\n\n\n\n If you pay the utilities of your rental units, you are allowed to deduct this expense from your taxes. Some examples of utilities include:<\/p>\n\n\n\n Any expenses incurred during the process of looking for a new rental property can be fully written off. In order to qualify for these deductions, however, you must spend at least half the time you are away on business, and the primary reason for travel has to be because of your business.<\/p>\n\n\n\n Technically this means you could write off a long weekend in California or Florida as long as the majority of your trip is spent working on business-related tasks.<\/p>\n\n\n\n Several items you could write off include:<\/p>\n\n\n\n Just as you can write off tangible tools, don\u2019t forget that the intangible ones also count for tax deductions. If it serves the purpose of helping your business, your employees, and your customers, you can write it off.<\/p>\n\n\n\n Here is a list of several of these tools to keep in mind:<\/p>\n\n\n\n The 2018 Tax Cuts and Jobs Act (TCJA) established a special income tax deduction (not a rental deduction) for landlords. Rental property owners may qualify for one of two options, depending on their income.<\/p>\n\n\n\n Now that we have discussed 20 awesome rental property write-offs, let\u2019s look at how to claim these deductions on your income tax.<\/p>\n\n\n\n You must keep detailed records of all expenses and income related to your rental properties and business as they occur. This makes the process of filing taxes at the end of the year much more manageable.<\/p>\n\n\n\n To file rental property tax deductions the same year you put money out, you must file with the IRS Schedule E form<\/a>.<\/p>\n\n\n\n Hang on to your records in case you are ever audited by the IRS. You will need to have itemized proof for each deduction you claim.<\/p>\n\n\n\n Things start getting tricky if you ever use the rental property as a personal residence. The IRS has certain rules about how long you can live on the property and what you can or can\u2019t deduct. If you do choose to live at your rental property, you would need to file the IRS Schedule A form<\/a>.<\/p>\n\n\n\n If you own rental properties, I guarantee you are missing out if you aren\u2019t working with an investor-friendly accountant who works with real estate investors on a regular basis.<\/p>\n\n\n\n One of the biggest financial perks of rental properties is the tax benefits, and unless you are an accountant yourself, you are absolutely missing out on some of the write-offs you could be taking.<\/p>\n\n\n\n The laws also change often regarding what you can and can\u2019t do, so you need someone who follows those exactly in order to maximize your write-off potential. Always hire a tax professional with real estate investing experience\u2014that way, you’re sure you’re always enjoying the most deductions.<\/p>\n\n\n\n \n \n ![\"\"](\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/04\/tax-strategies-books.png\" "\\"\\"")
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\n\n\n\nWhy do rental properties offer amazing tax benefits?<\/h2>\n\n\n\n
20 possible rental real estate write-offs<\/h2>\n\n\n\n
1. Mortgage interest<\/h3>\n\n\n\n
2. Property taxes<\/h3>\n\n\n\n
3. Operating expenses<\/h3>\n\n\n\n
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4. Depreciation<\/h3>\n\n\n\n
5. Repairs<\/h3>\n\n\n\n
6. Ordinary expenses<\/h3>\n\n\n\n
7. Necessary expenses<\/h3>\n\n\n\n
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8. Office space<\/h3>\n\n\n\n
9. Property management<\/h3>\n\n\n\n
10. Professional and legal fees<\/h3>\n\n\n\n
11. Homeowner\u2019s association (HOA) fees<\/h3>\n\n\n\n
12. Pest control<\/h3>\n\n\n\n
13. Licenses\/permits<\/h3>\n\n\n\n
14. Postage\/shipping<\/h3>\n\n\n\n
15. Travel and vehicle expenses<\/h3>\n\n\n\n
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16. Appliances\/fixtures\/equipment<\/h3>\n\n\n\n
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17. Utilities<\/h3>\n\n\n\n
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18. Costs incurred while searching for a new business property<\/h3>\n\n\n\n
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19. Memberships and subscriptions<\/h3>\n\n\n\n
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20. Pass-through tax deduction<\/h3>\n\n\n\n
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How to claim property tax deductions<\/h2>\n\n\n\n
One last thought on rental property write-offs<\/h2>\n\n\n\n
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