07/21/2023
Reasons to own Real Estate. Here are some for you consider....
1. Loan Interest/Points
If there is a mortgage on the property, the loan interest will probably be your single largest deductible expense.
Further, if you paid buy-down points on the property purchase or mortgage refinance, you’ll be able to deduct those as well.
Mortgage Interest (primary & secondary)
HELOC Interest for loans used to repair or improve the property
Credit card interest on items used for the property
Mortgage Points to purchase or refinance a rental property
Keep in mind, you can only deduct interest on money that was actually spent on your rental business. Therefore, you wouldn’t be able to deduct the interest of a withdrawn line of credit that is sitting in your bank account.
2. Depreciation of Assets
There are, in general, three types of costs you need to capitalize and depreciate:
The value of the structure, not the land
The value of improvements – such as appliances, carpet, windows, countertops, etc.
Equipment/Computers/Laptops
These expenses cannot be deducted in a single year, but rather must be spread out (depreciated) over multiple years.
Otherwise, people would abuse the system by claiming $100K in repairs in a single year to remove all tax liability, and then sell the property the next year to recoup their renovation ROI.
3. Taxes
Often the real estate taxes are paid through the mortgage company, and therefore show up on the Form 1098 that is sent from the bank.
If the property is free and clear of any mortgage, CONGRATULATIONS!, but you’ll have to look up your tax records online if you didn’t keep receipts of those payments. Other business-related wage taxes, permit fees, or personal property taxes are considered allowable deductions as well:
State, County and City Taxes
Social Security Taxes for Employees
Medicare and Unemployment Taxes for Employees
Personal Property Tax/Vehicle Tax
Permit Fees/Inspection Fees
4. Repairs
In a previous article, Sh*t Always Breaks, I discuss paying for the repairs and improvements using a separate emergency fund for each property. Repairs are defined as any effort to maintain the current condition of a property or asset.
Painting/Spot Patching
Plumbing Repairs
Air Conditioning Repair
Fixture Repairs
Labor Costs/Contractors
Incidentals related to a repair
Rental Fees for Tools/Equipment
5. Maintenance
Maintenance costs are often confused with repairs, however with maintenance, you’re not necessarily fixing anything. For example, the lawn will always need to be cut but it is never really “broken.”
You can also hire a pest company to treat the property every few months to prevent further infestations, even if the original pests are long gone.
Landscaping and Tree Trimming
Homeowner Association Fees
Pool Cleaning, Chemicals and Maintenance
Pest Control and Treatment
Tune-ups on Lawn Mowers, Chain Saws, Leaf Blowers, etc.
Light Bulbs
Smoke Detector Batteries
HVAC Filters
Janitorial Items
6. Insurance Premiums
All business-related insurance premiums are tax-deductible. When trying decide if the insurance is business related, I ask myself, “Would I buy this insurance if I didn’t own a rental?”
I have an Umbrella Policy which covers my personal assets and legal liability above and beyond the coverage on my rental properties. Because of the added risk involved with one of my less-polished properties, I decided to purchase this additional coverage.
I would not have purchased this policy otherwise, and therefore I can classify it, in good conscience, as a business expense.
Homeowners Insurance
Mortgage Insurance Premiums
Fire/Damage/Liability Insurance
Flood Insurance Riders
Theft Insurance
Workers’ Compensation Insurance
General Liability Insurance
Personal Umbrella Insurance
7. Utilities
You can deduct the cost of any rental property utilities that you pay for. You are still allowed to claim utility expenses even if the tenants reimburse you later, but you also have to claim that reimbursement as income.
Electricity
Gas
Heating Oil
Water & Sewer
Trash & Recycling
8. Travel Expenses
According to a recent survey by Cozy, 50 percent of American Landlords do not live near their properties. Any long distance travel to visit your assets or to conduct rental business can be tax-deductible as a business expense.
Airline Fares
Car Rentals and Taxis
Hotels
50 percent of meal expenses during long-distance travel
9. Vehicles
When expensing business vehicles, the actual asset must be depreciated over multiple years, however the upkeep can be deducted in the year the expense was incurred.
You have the option of deducting actual expenses, or utilizing a standard mileage rate of 56.5 cents per business mile driven (as of 2013).
Business Vehicles (depreciable)
Mileage or Gas/Maintenance/Usage of Business or Personal Vehicles
10. Management Fees
Even the best landlords need help from time to time. If you hire a property manager, or even an on-site manager, you are allowed to deduct that expense.
Property Management Companies
Individual Property Managers
On-site Manager
Condominium Association Fees
Special Assessments
Note: You should try Cozy property management software. It’s free, and can automate some of the most time-consuming elements of running a rental business: tenant screening and collecting rent.
11. Legal and Professional Fees
If you need to hire a pro, be it a lawyer, accountant or tax professional, you can expense the cost. If you ever have to evict a tenant, you can expense all reasonable court and filing fees.
Accounting Advice
Professional Tax Preparation
Tax Preparation Software (like TurboTax)
Structural Engineering and Consulting
Legal Fees
Lease Review and Editing
Court Filing Fees
12. Office/Operating Expenses
You have to work somewhere. My office is in our spare bedroom. Some landlords actually rent commercial office space.
A home office deduction is one of the most commonly flagged deductions by the IRS – and for good reason. Many business owners abuse this deduction, but it should be utilized if you conduct business in your home. Keep great records for the time you spent using that space for business and logically subtract any personal usage.
Personally, I don’t expense the square footage of my home office. In my opinion, it’s not worth the headache.
Ink & Printer Paper
Pencils, Pens, and Staples
Rental Software (like Cozy)
Legal Forms
Rent Paid for Office Space
Square Footage of a Home Office
Phone Bills
13. Advertising
If you are still using printed rental ads, STOP! Between Craigslist and Postlets, you’ll cast a wider net than any newspaper ad.
Radio, Newspaper, Online Ads
Signs and Banners
Ads in Phone Books
Printing and Postage for Mailers
14. Commissions
Occasionally, I will offer a $50 incentive to my current tenants if they find a replacement tenant upon their departure.
Commissions to Managers and Salespeople
Commissions for Tenant Referrals
15. Start Up Expenses
Stephen Fishman, J.D. says, “Any expense that would be deductible as an operating expense by an ongoing business is a start-up expense when it’s incurred before a business begins. Unlike operating expenses, start-up expenses cannot automatically be deducted in a single year. This is because the money you spend to start a rental (or any other) business is a capital expense—a cost that will benefit you for more than one year.”
The maximum allowable deduction for start-up expenses in the first year is $5000.
