How to max out write offs for out-of-state investment property

Question

Hi Everyone,

I'm based in CA and will be buying an investment property in MA/NH/RI in the next 6 months. I will not be using an LLC and so will pay landlord insurance and be able to make deductions directly from my personal income. I understand federally I can deduct payments on mortgage interest, property management fees to my onsite property manager, maintenance, etc. I know certain things like insurance, etc. can't be deducted.

Are there are big missteps I should make sure I'm not making in my assumptions/landmines I shouldn't step on to make sure I can deduct these expenses and receive the right rebates in my tax returns at the end of the year?

Cheers,
Pat

Basit Siddiqi · Answer

The W-2 income does not limit your deductions.
You are entitled to write-off as much as you want.

The next question is, is the overall loss considered passive?
If its passive, can I use the loss to offset my W-2 income.

Drew Sygit · Answer

@Pat McQuillan have you reviewed IRS form Schedule E?

Who told you that you cannot write off the insurance on the investment property?

You can also write off travel to and from the property and more.

Basit Siddiqi · Answer

You might potentially be able to deduct the travel costs from CA to MA/NH/RI once you acquire the property.You may want to work with a CPA who helps working with new investors to have a walk-through of what is deductible.

Julio Gonzalez · Answer

Have you considered a cost segregation study on your property? Here's an article with additional FAQs on cost segregation studies that you may find helpful. Feel free to reach out if you have any questions!

https://www.biggerpockets.com/forums/51/topics/1113749-cost-segregation-faq

Ben Trageser · Answer

Happy to have a conversation if you'd like in regards to strategy. As mentioned above, there a lot of different avenues to take with rental real estate and potential strategies.

Max Emory · Answer

@Pat McQuillan, get with an REI-savvy tax pro! They can walk you through all of this and will help you create a tax strategy based on your goals.

Your statement that "insurance can't be deducted" reinforces that it's most likely in your best interest to hire a professional to help you with this.

The forums are great but not a substitute for hiring a tax pro.

Sean Graham · Answer

Cost segregation will likely yield benefits as well

Pat McQuillan · Answer

Thanks all. An important thing to note is that my W-2 income is outside of AGI limits for all of these deductions. No one mentioned this as a factor, but I assume this would severely limit/prevent me from deducting anything other than depreciation?

Ashish Acharya · Answer

@Pat McQuillan For your out-of-state investment property, you can maximize tax write-offs by deducting mortgage interest, property management fees, maintenance, repairs, travel expenses for property-related business, and landlord insurance premiums. Additionally, depreciation on the building (not the land) is a significant deduction, and if you manage the property from home, you may qualify for the home office deduction. Avoid personal use of the property, as it can limit deductions, and be careful to correctly classify repairs versus capital improvements, as improvements must be depreciated. You’ll also need to navigate state tax obligations for rental income and potential depreciation recapture when selling.

Insurance is also deductible as well. Discuss cost seg with your tax advisor. *This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Pat McQuillan · Answer

Hi Drew! I understand there is an AGI limit that applies, restricting my ability to write off certain expenses if my AGI exceeds a certain amount.

Regardless of what can/can't be written off for my particular situation, I assume the majority of the tax savings I am able to write off would come back to me directly in my tax rebate, correct?

Might be a silly question, but this is true from what I understand. For example, if I wrote off $20,000 of deductible expenses for my property in my personal return and my effective federal tax rate was 25%, then I would expect the see an additional $5,000 (25%) included in my tax rebate for that year. Am I thinking about this correctly?

How to max out write offs for out-of-state investment property

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