Bottom line, when it comes to federal tax deductions, “Residential Investment Property” provides a significant tax shelter. This is evident if you own one or many rental properties.
You’ll achieve the largest tax savings as a real estate investor; not a small business. Real estate used as a small business includes realtors, builders, contractors and people that buy property to flip (sell quickly). This type of activity is not considered investing.
However, real estate investors buy property as long-term investments, which is greater than 1 year’s time, to rent out to tenants.
By treating the property as a small business instead of an investment, you’ll lose out on a substantial tax deduction called depreciation. Depreciation can be taken as a deduction to compensate the investor for the property as it ages as well as theoretical wear and tear.
You’ll find that another great benefit to investing in a rental property is, in many cases, you can show a rental loss on paper, even though you made money on the rental. It gets better. If you work a W2 job, you can reduce your W2 taxable income substantially with your rental property deductions.
Tax Benefits Of Rental Property:
You will take your rental property tax deductions on IRS Schedule E. This schedule is where you’ll indicate your investment property income and expenses. There are several expenses that can be taken as deductions, including “other” expenses (line item 18).
Here is a summary checklist of rental property tax deductions that you can take advantage of as an investor (be sure to check with your tax accountant for a comprehensive list, and what applies to your specific situation):
This would include any form of advertising to get a tenant into your rental property. This includes signs, flyers, ads and business cards.
You can deduct any mileage you drove to maintain and manage your property. For instance, you drive from your home based office (which you can set up as a landlord) to your rental property. You would be able to claim this mileage as an expense on your Schedule E.
You may notice the key words being “maintain and manage” your property. This means if you need to drive out to the property to check on how a repair is coming along, you can write off this mileage.
If you drive to your rental home to speak with your tenant about anything regarding the home or to collect rent, this is deductible mileage.
Managing your property can also include doing a drive by to look at the property to ensure it’s in good standing. Just make sure you keep good mileage records including the purpose of the trip.
If you live out of state, then you might be able to deduct travel to and from the state of the rental property.
Your residential rental property gets depreciated over 27.5 years. For example, if you pay $1,000,000 for the home, you can take a depreciation tax write-off of $36,360 ($1,000,000/27.5 yrs) per year, which is taken as a “paper loss” against any gross income you make. This is a substantial tax deduction.
• Cleaning & Maintenance
• Homeowners insurance
• Mortgage Interest
• Property taxes
• Utilities (if you pay them instead of the tenant)
• Phone costs, PO Box, internet costs related to your rental property
• Repairs & Supplies
• Educational Expenses
For example, you can deduct any books or courses you buy that have anything to do with rental properties
• Real estate club dues
• Tenant credit report fees
• Professional fees
This includes legal, accounting, and realtor fees
• Management Fees
If you pay a property management company to manage your rental property for you, you can deduct these management fees.
• Homeowners association fees
You should always consult a good tax accountant when thinking of investing in real estate.
“Residential Investment Property” is one of the best remaining tax shelters available.
For those of you who would like more information, please contact me.
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