Real Estate Investor’s Guide To Investment Property Tax Deductions

Posted on: June 3, 2011

Categories: Procedures, Profit, Property Management, Things To Consider

Author: lbuen

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Investment Property Tax Deductions Image by Buyfixandprofit.com

Understanding The Scope of Investment Property Tax Deductions

One of the perks that attract investors to put their money in investment properties is tax incentives. No other investment vehicle offers this much tax advantage that rental property investment can offer. These deductions can significantly mean your profit or loss. However, those new to their role as landlords, and a few old-timers often unwittingly pass up on the opportunity to make tax savings from their property investments because they do not know the extent of the exemptions. Cash in on this exemptions by familiarizing yourself with what are covered in investment property tax deductions. If you own small residential rental property(s), then you can enjoy the following tax deductions:

Investment Property Tax Deductions For Owners of Small Residential Rental Properties

Depreciation. You, as a landlord, can recoup the cost of your property through depreciation. Depreciation counts the decrease of the value of your property over time. The accounting value of your property, as reflected on your financial statements, decreases because of depreciation. However, this does not make a dent to the market value of the property. By depreciating your property quickly, you can offset income and realize tax savings much sooner. At present, the depreciation for residential properties should be uniformly distributed within 27 and a half years, and no more than 39 years for commercial investment properties.

Interest. Interest is usually the most sizable deductible expense of a landlord. This includes interest on credit cards for expenses used in operations of your rental property, and mortgage interest payments on loans you used to fund the property acquisition or renovation. Mortgage loan interest can be deducted to cancel out an equivalent amount of income. This deduction is similar to the interest deduction for a home mortgage.

Maintenance Expenses. The cost of repairs to rental real estate are totally tax deductible as long as the repairs are really needed, standard, and reasonably priced. You can reduce your tax payable if you incur expenses in fixing gutters or floors, repainting, replacing rotten wood housing the water heater, replacing broken windows, fixing leaks and toilets, and many others. This deduction is especially beneficial for owners of old properties that need substantial fixing since the cost of doing these can be hefty. This is a privilege real estate investors can enjoy but mere homeowners cannot, so take advantage of this. However, this does not cover renovations that extend the life or boost the value of the property.

Insurance Premiums. Insurance premiums that cover rental property investments can be exempt from tax. In contrast, insurance premiums for homes are not tax deductible.

Local Travel. As a landlord, you can deduct the expenses you incur when traveling anywhere for your rental property operations, such as when you drive your SUV, van or pickup to your single-family rental property to handle a complaint of a tenant. You can also include here your hotel bills, airfare, meals, and other related expenses if you travel overnight while conducting business such as looking for more properties to add to your rental property protfoflio. Some investors take advantage of these tax breaks by incorporating other plans, such as taking a side trip vacation, with the said business trip. However, be careful and properly document your travel expenses if you plan on doing this since the IRS will examine overnight travels closely. You do not want to attract unnecessary attention of our friends from the bureau.

As a rental property investor, there are more items that you can deduct from your taxable income. However, we limit our discussion to these items to give way to a brief discussion of what could possibly forfeit your prerogative to tax savings.

Be Careful, You Can Forfeit Your Investment Property Tax Deductions

Be careful with the people you take in as tenants. You can possibly lose nearly all your tax deductions if you rent your property to a friend or family member.  There are also strict guidelines to follow when using funds from your self-directed IRA to purchase investment property. Finally make sure to keep a good record of how much time you spend on your real estate business.  If you can qualify as a Real Estate Professional per IRS guidelines this will allow you to deduct 100% of your paper losses against your income.  To qualify as a real estate professional per the IRS you must spend more than 75o hrs materially participating in your real estate business and must spend more than half your professional working hours materially involved in the your real estate business.

It pays for a landlord to know what is covered in investment property tax deductions since this could bring in substantial tax savings that can significantly impact returns.

 Real Estate Investor’s Guide To Investment Property Tax Deductions
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