Ten Real Estate Investment Tax Tips

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2. Mortgage Interest and Points. Mortgage interest is deductible for the first and subsequent mortgages or equity line. Points are deductible over the life of the mortgage for real estate investments, either for the original loan or for refinancing. If refinancing, the original points paid are deductible in full only if you do it with a lender different from the one refinancing.
3. Capital Gains. The portion of your basis (original cost plus permanent improvements) minus sales price, is subject to a lower tax or capital gain tax, ranging from 0% to 15% depending on your income: up to $413K is taxed at 15% for capital gains. Anything over that is 20% for capital tax gain.
4. Business Use of Residency. You can deduct a portion of your residency used for real estate business only if the space is exclusively used for that. Choose between the actual percentage of square footage or the home office deduction, the one that is safer: the home office deduction. It allows up to $1,500 or $5 per sq. ft. used for business up to a maximum of 300 sq.ft. per year.
5. Vacation Home. Rent income from a vacation home is free if you rented it less than 15 days for the year but you cannot deduct expenses or depreciation. If renting is over 15 days, your deductions are limited to the rental income received, subject to the passive loss deduction rules. See below. If you inhabit the vacation home, split the expenses between the rental and personal use.
6. Depreciation Recapture. The portion of depreciation recaptured is taxed at 25%. This is the depreciation expense you took for the years while you own your real estate investment. Capital gains tax that ranges from 0% to 15% doesn't apply to this depreciation portion recaptured. If you plan to sell your real estate investment over a short period of years, maybe passing on depreciation is a consideration.
7. Cost Segregation Analysis (CSA). A CSA is done to separate personal property (furniture and fixtures) from real estate property when you purchased or put for rent your property. This separation will help you with depreciation: personal property is depreciated at a shorter period, typically 5 to 7 years while real estate property is depreciated at longer periods, 27.5 years for residential and 39 years for commercial.
8. Real Estate Professional. The key to this rule is "material participation". In principle, all limited partners are subject to the passive loss rule. You cannot deduct real estate losses beyond the income your property is producing unless you are a real estate professional (licensed or unlicensed) who participate actively managing your properties for over 750 hours a year.
9. FMV or Basis. This is a question if you convert your first residency into a rental property. For tax purposes, you need to determine the right value of the property for depreciation. This is when FMV or basis election comes to play. If you put the property for rental business before determining this, it may be useful, depending on the value of the property, to do an appraisal. The appraiser will search for comparable value at the time the property was placed on service in addition to evaluate the property physically to determine the right FMV.
10. Passive Loss Deduction. Real estate losses are passive losses and the maximum amount you can deduct in a year without any passive income (such as rental income) is $3K, unless you qualify as a real estate professional and your tax income is less than $100K, you can deduct up to $25K per year. For every $2 your tax income exceeds $100,000, the allowance is reduced by $1.
11. Capitalization or Deduction. You can deduct up to $2K per invoice for repairs. If you have in place a writing accounting procedure the amount increases to $5K per invoice. Any amount over those limits must be capitalized and depreciated.

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