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Every year, millions of real estate investors spend more on taxes than they need to, because they don’t understand just how many tax deductions are available for a rental property. There’s not nearly enough room in a mere blog post for a comprehensive list, but here are a dozen or so of the most commonly-available tax deductions you can take on rental properties.
Interest on Investment-Related Loans
Yes — the interest on your mortgages, rehabilitation and renovation loans, and even on credit cards used specifically for investment-property-related purposes can be deducted from your taxable income. Just be aware that you don’t get this deduction on unspent money — you have to have actually used it for your investment in order to get the deduction.
Depreciation on Your Long-Term Investment Purchases
A ‘long-term’ purchase is the purchase of something you expect to last for longer than one year, such as a major appliance, carpet, or swimming pool. You don’t get to count the entire value of long-term investment-property-related purchases against your taxes the year you buy them — instead, you can only count the depreciated value of each purchase each year. For rental buildings, this is easy — the depreciated value is 3.6% of the value of the building each year for 27.5 years. For property such as appliances and furniture that goes into an investment rental, it’s even easier: you count either 20% or 14.3% of the value of the item each year for 5 or 7 years depending on exactly what the item is.
Repair Costs
So long as the repairs you make to a rental are ‘ordinary, necessary, and reasonable in amount,’ you can deduct 100% of repair costs from your taxes in the year they were paid for. Just keep in mind that the tax code will not cover a replacement when a repair will do, and even a repair that restores something to a meaningfully better condition than it started will count as an ‘improvement’ rather than a repair. Preventative maintenance, however, is always completely tax-deductible (and a very good idea in the first place.)
Travel Expenses
If you travel around the area as part of your investment activities, you can deduct a portion of your gasoline, auto repair, and auto maintenance bills equal to the proportion of miles that your vehicle was used for work, rather than as a family vehicle. (Alternate methods of calculating the local travel deduction exist, but are too complex to cover in this post.) Similarly, even long-distance overnight travel by plane or similarly can be deducted — though this takes a lot of careful documentation and is always carefully examined by the IRS.
A Home Office
If you do your real estate investing from your primary residence, you can qualify for a Home Office deduction. To do so, you must prove that you have a part of your home that you ‘regularly and exclusively’ use for purposes related to your income stream. Technically, it doesn’t even have to be an office — if you have a workshop or other area that you use for activities related to the property, it can often be deducted as well.
Employees and Contractors
The wages of any employees or contractors you hire can be deducted from your investment business taxes as well. This doesn’t have to be restricted to the blue-collar roofer/landscaper/general contractor types, either — an advertiser, a web designer, a real estate appraiser, a lawyer, and those other white-collar types are treated the same way under the tax code. Even the fees you pay to a property management company can be deducted under this rubric.
There are more, naturally — insurance premiums, a portion of damage caused by a disaster or theft, HOA dues if your property is in an HOA-controlled territory, and many other items can be deducted from your taxes as well. This tax season, sit down with an expert and figure out how many of them you’re missing out on — and then come back and tell us in the comments just how much money you saved.
Every year, millions of real estate investors spend more on taxes than they need to, because they don’t understand just how many tax deductions are available for a rental property. There’s not nearly enough room in a mere blog post for a comprehensive list, but here are a dozen or so of the most commonly-available tax deductions you can take on rental properties.
Interest on Investment-Related Loans
Yes — the interest on your mortgages, rehabilitation and renovation loans, and even on credit cards used specifically for investment-property-related purposes can be deducted from your taxable income. Just be aware that you don’t get this deduction on unspent money — you have to have actually used it for your investment in order to get the deduction.
Depreciation on Your Long-Term Investment Purchases
A ‘long-term’ purchase is the purchase of something you expect to last for longer than one year, such as a major appliance, carpet, or swimming pool. You don’t get to count the entire value of long-term investment-property-related purchases against your taxes the year you buy them — instead, you can only count the depreciated value of each purchase each year. For rental buildings, this is easy — the depreciated value is 3.6% of the value of the building each year for 27.5 years. For property such as appliances and furniture that goes into an investment rental, it’s even easier: you count either 20% or 14.3% of the value of the item each year for 5 or 7 years depending on exactly what the item is.
Repair Costs
So long as the repairs you make to a rental are ‘ordinary, necessary, and reasonable in amount,’ you can deduct 100% of repair costs from your taxes in the year they were paid for. Just keep in mind that the tax code will not cover a replacement when a repair will do, and even a repair that restores something to a meaningfully better condition than it started will count as an ‘improvement’ rather than a repair. Preventative maintenance, however, is always completely tax-deductible (and a very good idea in the first place.)
Travel Expenses
If you travel around the area as part of your investment activities, you can deduct a portion of your gasoline, auto repair, and auto maintenance bills equal to the proportion of miles that your vehicle was used for work, rather than as a family vehicle. (Alternate methods of calculating the local travel deduction exist, but are too complex to cover in this post.) Similarly, even long-distance overnight travel by plane or similarly can be deducted — though this takes a lot of careful documentation and is always carefully examined by the IRS.
A Home Office
If you do your real estate investing from your primary residence, you can qualify for a Home Office deduction. To do so, you must prove that you have a part of your home that you ‘regularly and exclusively’ use for purposes related to your income stream. Technically, it doesn’t even have to be an office — if you have a workshop or other area that you use for activities related to the property, it can often be deducted as well.
Employees and Contractors
The wages of any employees or contractors you hire can be deducted from your investment business taxes as well. This doesn’t have to be restricted to the blue-collar roofer/landscaper/general contractor types, either — an advertiser, a web designer, a real estate appraiser, a lawyer, and those other white-collar types are treated the same way under the tax code. Even the fees you pay to a property management company can be deducted under this rubric.
There are more, naturally — insurance premiums, a portion of damage caused by a disaster or theft, HOA dues if your property is in an HOA-controlled territory, and many other items can be deducted from your taxes as well. This tax season, sit down with an expert and figure out how many of them you’re missing out on — and then come back and tell us in the comments just how much money you saved.
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