What expenses can I deduct for taxes?

Question

Newbie investor here.

I've read that I can deduct depreciation from my expenses.... What other non-cash expenses can I take out? A maintenance reserve? A vacancy reserve? Or is this not allowed?

Also, I know I can deduct mortgage interest. However, if I roll the FHA insurance premium and repairs into an FHA 203k loan, would that blindly overstate the interest I can deduct? For example, would I be double counting if i deducted repairs expense and interest related to the repair dollars in a 203k loan?

Thanks!

Aaron Gordy · Answer

@Austin Bright Also ask about accelerated depreciation. That is a big one imo.

Aaron Gordy · Answer

no...https://www.accountingtools.com/articles/what-is-accelerated-depreciation.html

Austin Bright · Answer

Would just be MACRS? Or is it done differently for Real Estate?

Austin Bright · Answer

@Bob Norton

So if I live in a duplex and rent out the other side, I can deduct that loss from what would be my taxable salary from the company I currently work for?

As for the estimated tax on rental income... My currently witholdings related to tax, ss, medicare are about 25.5%. Would this be a reasonable % to use on my rental income then? I plan on consulting a tax accountant in my area, but I want to have some idea on what my questions should be. Thanks!

Bob Norton · Answer

@Austin Bright @Michael Smith Michael is correct.  As for your net rental income, it is not subject to self-employment tax. If you have a net loss from your rental activity then you can deduct up to $25k of the loss from your W-2 earnings to determine your adjusted gross income for income tax purposes (with limitations for high earners).  The government does not withhold taxes on your rental income, so you may need to make estimated tax payments or could consider increasing your tax withholdings from your salary to cover any amount you may owe on your net rental income.

Austin Bright · Answer

Thanks Michael!

Do you know if rental income would be treated the same as my salary with respect to medicare and ss? Or would the federal govt only take out the income tax?

Michael Smith · Answer

Austin, for full disclosure I'm not a tax professional so please consult one - - - Depreciation/depletion/amortization are the only "non-cash" expenses you can deduct. You can't deduct money set aside in a reserve to pay for future expenses - - - Regarding the mortgage, your monthly statement and escrow statements should itemize exactly how much is going to interest, principal, MIP, etc. so that you can classify those correctly - - - For the renovations made with an FHA 203k loan, those would be considered capital improvements and not repairs so they should be added to the cost basis of the property and depreciated over time.

What expenses can I deduct for taxes?

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