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Posted almost 3 years ago

10 Tax Deductions for Real Estate Investors

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Before we start to talk about tax deductions that are available for real estate investors, always make sure to talk with your CPA first. A lot of new real estate investors start to invest because real estate can offer one of the best tax benefits in the world. 

And these just going to be a few, in this case, top ten tax deductions available to real estate investors. At the same time, old laws change new ones, so investors need to keep an eye on real estate tax deductions and other tax law changes, that's why having a professional CPA always helps so you can keep your finger on the pulse.

1. Home Office.

If you, just like most of us work from home now, and if you can prove that you are conducting business or real estate investment activities, some percentage can be deducted from your home bill. There are no deductions for those who work for others from their home, but if you're a real estate investor, you may still qualify for the deduction.

2. Repairs and Maintenance.

Repairs, just like adding new paint or new carpets, can be deducted from your rental property and if it is a major improvement or replacement, as new a roof, it may be considered a “capital improvement,” in which case you will have to spread the deduction over several years in the form of depreciation. It could be sometimes tricky to understand the difference between repairs and capital improvement, for example, if you replace all the windows to upgrade and improve energy efficiency, it's a major improvement and if the baseball goes through one window that you are replacing, it is a repair.

3. Closing Costs

Many closing costs are tax-deductible, while others can be amortized over time as part of your acquisition costs. Although tax deductions can be very difficult to calculate, given all the varying factors that go into the equation. Also with all possible tax deductions, your first priority is most likely to save money and earn tax advantages. For this purpose, do the groundwork: research whether taking a standard deduction versus deducting your closing costs would save you the most.

4. Depreciation.

Most of the purchase price of your property can be written off as a tax deduction, where it should be spread over 27.5 years, where buildings lose value as they age, so the IRS allows you to deduct 1/27.5 of the property's value annually. Other items just like the “capital improvements” should also be amortized rather than deducted in the year in which you make them. As mentioned before, learn more about rental property depreciation by talking with your CPA to make your life easier.

5. Tenant Screening.

If you conduct your tenant screening yourself and you paid to check their eviction history reports, criminal records, credit reports, identity verification, employment, income checks, home history checks, those fees can be deducted. Have you bought a lease agreement this year, or maybe eviction notices, property management contracts, because these costs can also be deductible as well.

6. Property Management Fees.

Did you know that you can write off your management fees, including the monthly percentage fee and any other fees as well? If you hire a property management company, their fees are deductible against your rental income. Most property managers charge between 8% and 12% of the collected rent for their services (depending on how many units you have), so it's nice to be able to deduct this significant expense.

7. Other Fees.

Any other professional fees associated with rental properties can be tax-deductible, just like landlord software, bookkeeping, accounting, lawyer, real estate agent, and any other fees you pay for professional services may be deducted from your taxable income. Talk to your accountant first, to understand how legally and ethically you can shift as much of your tax expenses as possible to the business side of the ledgers.

8. Business Travel.

You may be able to deduct travel expenses if you can provide evidence that you are traveling mainly because of your business. Whenever you are planning to deduct travel expenses, collect as much documentation as possible to convincingly prove it was a real trip. Make sure to track your mileage for all trips to and from your rental property, because sometimes real estate investors travel in their home market, defined as a 40-mile radius, they may deduct 50% of meal costs while traveling to visit properties they already own, or while when meeting with other business contacts, such as partners, real estate agents, or contractors.

9. Mortgage Interest.

The mortgage interest deduction allows you to reduce your taxable income by the amount of money you’ve paid in mortgage interest during the year. Instead of having to itemize deductions on your tax return, any investment property owner can use their mortgage interest as a business expense on IRS Schedule E, which is the form where you'll calculate your taxable rental income. All interest that you pay your mortgage lender on rental property loans is tax-deductible.

10. Other Business Items.

If you have bought a new piece of equipment such as a phone, computer, tablet, printer toner, computer paper, pens, for your business or office this year and if you mainly use it for work, you may be able to deduct expenses from your taxable income. Other items such as Internet bills, telephone bills, can be deducted as well, but as always you will need to be able to document that this was done for business purposes.

A good rule to remember is to always document any expenses you plan to deduct, keep all receipts after you purchase new equipment, invoices after a trip or purchase of new software, collect them throughout the year, create a separate checking account for real estate expenses and as always make sure to consult with your CPA about existing or new laws and regulations.



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