Ten Key Tax Deduction for Real Estate Investors

If you are already on the property ladder, chances are you have a golden opportunity to run a successful business with real estate. Whether you own just one home other than your regular living space or a few more, there are plenty tax deductions you can take advantage of legally and turn your investment into a total success. Of course, there is a difference between a passive investor, i.e. someone who just rents out a spare home and a real estate professional who spends the majority of their time on renting out properties. The latter can get full rental losses tax deductions while the former can only claim up to $25,000 on passive losses. But hey, even as at that, a five-digit figure is not bad at all.

Here are some more deductions you could apply to your income tax return as a real estate investor.

Security Deposit

Initially when your tenants moved in they most likely paid a security deposit. This money is not taxable, because it is not actually part of your income as it is given with the intent to be received back after the end of the lease. However, it doesn’t always work this way. In fact, in most cases tenants do not receive their deposit in full or at all because they have either breached the contract or damaged in some way the property and the furniture/appliances inside. In such cases the landlord can deduct the cost of any repairs they had to carry out and claim those as deductible expenses on their tax return.

Repairs and Improvements

All the repairs and general improvements of the property you carry out, not only after a tenant has moved out, but also throughout their stay in your property, are considered deductible expenses. This can include fresh painting of the walls, replacing a boiler, fixing a broken fridge or buying more furniture requested by the tenants. Also, in cases where an emergency repair is needed and you as an owner are not around to do it, your tenants can pay for it with their own money and ask for the cost to be deducted from the rent due to you that month. At a glance it may look like a loss, but actually you can still deduct the repair cost from your tax return at the end of the financial year.

Common Deductions

• If you are still paying mortgage on the property you are renting out, we have good news for you.
• Your mortgage interests are deductible as well.
• Along with that, any insurance you pay on the property and taxes can also be claimed back.
• If you travel to the estate to carry out maintenance or to take the due rent, you can deduct the travel expenses. These could be public transport fares or mileage at the standard mileage rate, approved by the IRS.
• It is even possible to claim long distance expenses if you live in another state or country.
• Other common deductions include services you pay for, for example regular weekly cleaning, mowing the lawn, lift maintenance and wages of the building manager if you have one.
• In the unfortunate case of property damage by a natural disaster or criminal activity you are also eligible to deduct some or all of the cost.
• Last but not least, tax deductions for real estate go as far as claiming the accountant fees for preparing your annual tax return. Isn’t that great?

As a real estate investor you may find yourself on the winning side much easier than many other entrepreneurs. While some businesses are very profitable, they don’t give you the opportunity to apply as many tax deductions as real estate investment does. The more profit you make and the less costs you incur, the more money you have to give the IRS, and of course who wouldn’t want to keep as much as possible for themselves. When you are a property owner you can do that easily and completely legally.

Depreciation. The value of a property often depreciates with time and other economic changes. This means that as a landlord, you can get some of the money you paid as rental income tax back. Usually, this does not happen in the same financial year, but over a period of a few years. Nonetheless, it’s still a cheque of extra money you could put towards new investments, savings or just treating yourself with something you love.

Insurance. Wouldn’t it be fantastic if you could also deduct your landlord liability insurance premium? Well, guess what, you can! Not only that, but any other insurance related to your rental activity, such as theft and loss, fire or flood damages and so on.

Independent Contractors and Employees. If you’ve made arrangements for various services to be carried out in the property during the rental period, for example regular cleaning, you can write your contractor’s wages off as rental business expenses. The same also applies for employees’ salary, for instance, if you have a building manager in residence. The end result of applying this will be less tax you owe on your income as a landlord.

Travel Expenses. This is very little known benefit of the real estate tax, but you can deduct your travel expenses, which relate to any activity of managing or servicing your property. For example, you can deduct travel to the place when you go there to resolve an issue, your tenant has complained about or to the store if you need to buy a specific part, needed for the repair of an appliance. Your travel expenses are deductible not only on local travel, but also on long distance. Therefore, in some cases you could also be able to deduct air fares if you live abroad or in a different state.

Damages and Theft Losses. This is never something you hope for, but it is useful to know that if your property suffers flood, fire or an earthquake, you can deduct part of the damage costs. Unfortunately, you would be able to deduct the sum in full only in extremely rare case. Generally, the amount of the deduction will depend on the size of the damage and whether you had appropriate insurance. If something valuable has been stolen from the property such as furniture, electric appliances or electronics that belong to you, their value can also be deducted from your real estate tax.

Legal Expenses. As unfortunate as it is, landlords often have to use legal services to deal with irresponsible tenants or just to get their property back. The experience on its own is very stressful and not cheap by all means. In many cases, the tenants do not pay the legal expenses even if they’ve been evicted by a court order and all costs end up on the landlord’s bill. That being said, we bring some fresh air into a situation like this by letting you know as a real estate owner you can deduct your property manager, accountant or lawyer fees from your due tax.

Interest. If you are still paying off a mortgage for the property you are renting out, it comes in handy to be aware that you can deduct your interest rate from your real estate income tax. Other interests, such as those on credit cards used for purchasing goods and services for the property or loans taken for repairs, are also fully deductible.

Fulton Abraham Sanchez, the founder of FAS CPA & Consultants of Miami, FL, is a Certified Public Accountant specialized in Tax Planning. You can email him to [email protected].

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