The hidden gold mine
Some of the best financial advantages of investment property ownership are the many ways you can utilize tax deductions on any given property you acquire. As standard investment property advice however, it is always recommended that you consult your tax professional to help you fine tune and go over all the deductions available to you individually.
Here are just a few of the most basic tax deductions available to property investors. Keep in mind, these deductions are for rental properties. Shortly-held properties (flips) will not be allowed these types of deductions, and are subject to either regular income tax rates, or capital gains rates, depending on how long you’ve held the property.
The most basic expenses
Rental properties throw off a great deal of standard deductions that can effectively reduce the gross income of your investment property, thus saving you in taxes. These would include items such as any fees for your property management, insurance on the property, taxes, regular landscaping services (like lawn cutting and snow removal), tax preparation, and any losses from theft or any non-covered insurance losses.
In addition, mortgage interest on any investment property is fully deductible. You’ll need to remember that your total mortgage payment covers both principal and interest (albeit usually a small amount of principal each month). You’ll need to make sure you get your total yearly interest only amount from your lender. In addition, remember too that costs associated with obtaining your mortgage are not considered deductions. So items like appraisal fees, commissions or processing fees could not be deducted. Rather these costs would be rolled into the cost “basis” of your property. They then could be amortized over the life of your mortgage.
Other common deductions
Another common deduction, especially if your rental property is a condominium, are home owner association fees. Many single family homes also belong to local home owner associations to share open space or a beach, for example. These are paid with the home owner association fees. In addition to these fees, if the condominium made any repairs to common areas and you were billed for them, then those costs are deductible as well. However, condominium improvements are not deductible.
Don’t forget that any travel related expenses are deductible as well. Your cost to travel to and from each of your investment properties is fully deductible when you go to collect rent, or meet with a tenant, inspect a unit, or make repairs to a unit. You’ll have a choice of either deducting the actual costs or using the standard mileage rate. Either way, you’ll need to keep very careful records of your travel.
Deciphering repairs versus improvements
All repairs done to your investment property are fully deductible too. Just make sure they are considered repairs and not improvements. Basic investment property advice will tell you that if you’re doing something to your property to keep it in good shape, then that’s a repair. But if you’re adding value to the property, then that’s an improvement. For example, when you first acquire a property and paint all the units – that’s a capital improvement. But after a tenant you’ve been renting to moves out, and you hire a painter to come in and re-paint the unit to spruce it up, that can be considered a repair. Adding carpeting? That’s always going to be considered an improvement. Fixing a leaky faucet? Certainly, a repair. Changing to a new faucet? Improvement. You get the idea…
When you make improvements, while the costs are not deductible, they can be amortized and recovered through depreciation – as well as when you go to sell the property. Make sure you keep accurate records of all repairs and improvements!
Always consult your tax pro
As mentioned earlier here, proper investment property advice says that you’ll definitely want to consult with a tax professional (whose fees will be deductible) before taking any deductions on your taxes. Overall tax laws are voluminous and a tad confusing to the layman. You’ll certainly require the help of a pro in this area so you don’t make any costly errors based on ignorance. After all, the IRS can be very unforgiving. And you’ll also want to feel comfortable knowing you’re utilizing all the possible deductions potentially available to your situation.
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