Can you deduct real estate purchases from your taxable income?

Question

Hi, I'm new to real estate investing. I was wondering if I form an LLC to use for making investments, could I deduct the purchase of real estate from my regular income?

For instance, let's say I make $200,000 a year from my retail business and I purchase a $50,000 property to rent out. Can I deduct that $50,000 investment from my $200K income, so that I would only be taxed on $150K?

Ned Carey · Answer

Simple answer NO

You are buying an asset. The money isn't gone, you still have it. It is just tied up in the property.

Money you spend on repairs insurance taxes etc is deductible, but the price you pay is not. However you do get to "Depreciate" the property. In other words the price of the property is deducted over time. It is not quite as simple as that but that is the concept.

Now when you sell a major asset like property, if you lost money on the sale, you deduct a capital loss on your tax return. If you make money on the sale, then you have a capital gain that you have to pay tax on.

You don't need to know how to do this. That is why you hire an accountant.

Brandon Hall · Answer

@David Dachtera I feel you are on the right track in your thinking, however the way you laid it out was not correct. Of course REI tax is an extremely complex area so it's tough for anyone to lay everything out correctly!

@Wilson Churchill and @Ned Carey are correct here, however I do want to point out something that has not yet been mentioned.

@Yeshua  Smith When you purchase a property, the capital expenditure is NOT a currently deductible business expenses. Rather, you have moved money from one "account" to another "account." You recover the cost of your expenditure over 27.5 years (39 commercial) via depreciation.

It's important to note that the losses generated from your rental will NOT automatically offset business income. The members of pass through entities are subject to the Passive Activity Loss (PAL) limitations. If your MAGI is over $100k ($150k if married filing joint), losses generated from your rentals will not offset business income.

Business income is active income whereas rental income is passive income. Because the economic nature of the transactions are dissimilar, they cannot be used to offset one another unless certain loopholes are taken advantage of. If your NET income is truly $200k, you will have a hard time deducting any passive losses generated from your real estate activities, whether the business owns them or not.

However, at the end of the day, unless you are utilize cost segregation as a tax liability limiting strategy, you generally want to earn money from your rentals :)

Hope this helps!

John Thedford · Answer

Wouldn't it be nice! Short answer: yes and no. As others stated, you can "deduct" the price of the property over time. You can deduct certain expenses in the year they are paid, but the property must be depreciated (which is a deduction) according to IRS rules (27.5 years for residential and 39 years for commercial). That works out to roughly 3.6% per year of the price of the property (not including land which does not wear out). Add in other costs that can be deducted such as taxes, insurance, repairs, accounting, etc...and you will see that RE offers great benefits not only for shielding income, but also for building long term wealth. It is the best game in town IMO!

Fred Heller · Answer

Buildings are depreciated so you will deduct the cost of the building over time. But you can't deduct the full cost of the building in a single year.

Sarah Donatelli · Answer

Thank you for asking the question @Yeshua Smith, and thank you very much @David Dachtera, @Ned Carey, @John Thedford, and @Brandon Hall for the thoughtful answers! I had the very same question.

Account Closed · Answer

This is a question for a CPA.  Any time you involving taxes or law, you need to consult a CPA or attorney.  I think there are a number of them here in Bigger Pockets.  Theirs are the answers you should heed.

That being said, ask 5 different attorneys or 5 different CPA's, and you'll get 10 different answers.  There are absolutes, and after that, there is one huge grey area.  That big grey area is the reason you will get so many varying opinions.  Some of these professionals are very aggressive and some are very conservative.  You need to to choose one to advise you who suits YOUR style.

In addition, you may want to take a seminar on basic accounting.  The question you asked is answered by the definition of the expense - is it a capital expense or an operating expense.  They are accounted for differently and their tax treatment is different.  Gaining some basic understanding will help you grasp this concept that is fundamental to running your business.

Brent Coombs · Answer

Wilson, are you asking us to read between the lines? Are you just disagreeing with David saying "Yes"? (In which case, I tend to agree).

What @Ned Carey said. I would be very surprised if the full initial purchase price of buying an Asset out of your your income would be tax deductible straight away. Isn't it the income and expenses that result from that purchase, not the purchase itself? [Not tax advice]. Cheers....

Wilson Churchill · Answer

He specifically mentioned renting the property. Whether the property is purchased within an LLC or not, the treatment is the same.

"or instance, let's say I make $200,000 a year from my retail business 
and I purchase a $50,000 property to rent out. Can I deduct that $50,000
 investment from my $200K income, so that I would only be taxed on 
$150K?"

David Dachtera · Answer

Yes - talk to an investor-friendly tax accountant. I'm not sure @Wilson Churchill understands you're not talking about depreciating, rather about the business paying to acquire an income-producing asset or inventory and deducting that expense from its taxable income. That is, if the LLC is treated as a "pass thru entity", it's expenses, etc. may figure against your other personal income in the right circumstances if your tax accountant says you did everything right to make that happen.

I'm not a financial professional - you'll have to get that input on your own.

Wilson Churchill · Answer

You have to deduct the cost of the building (not the land) over 27.5 years (for residential real estate). See Publication 527 for more information.

Can you deduct real estate purchases from your taxable income?

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