Tax Write-Offs for Real Estate Investments

Those interested in investing and those seasoned investors may often ask, “What items can we deduct when it comes to our investment properties or personal properties even”? It seems if documented correctly most everything could be a potential write-off in the correct situation. So, document, document, and document some more to ensure you are getting the maximum benefits for your wallet.

Also, have a good tax advisor. They are worth the investment especially when you are getting into multiple tax write-offs. The law is constantly changing and shifting, so having a good CPA in your corner should maximize your return and they should be able to pay for themselves in the money you’d be saving.

Should you be seeking Tax advice in the Greenville NC or Winterville NC area, I’d be glad to assist in connecting you with one of my CPA vendors. They will be able to go further into these tax benefits with you and how you too can become a great investor when it comes to Real Estate in the Pitt County Market.

Depreciation
Depreciation is the process used to deduct the costs of buying and improving an income producing property. Rather than taking one large deduction in the year you had purchased (or improved) the property, depreciation distributes the deduction across the useful life of the property. For general instances, depreciation is depreciated at a rate of 3.636% each year for 27.5 years. In addition, only buildings or structures can be depreciated, land is unable to be depreciated.

The IRS deems properties are depreciable if they meet these requirements:  

  • You own the property (you are considered the owner even if the property is subject to a debt/loan).
  • You use the property in your business or as an income-producing activity.
  • The property has a determinable useful life, meaning it’s something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes.
  • The property is expected to last for more than one year.

So, let’s say your depreciation value is $275,000 on your property. That is $10,000 per year = (275,000/27.5). Now, let’s say your net income on the property was $7,000 after rental income minus expenses. You’d have collected $7,000 tax free, while having a $3,000 deductible towards other income.

Depreciation starts when the property is “ready for use”, so if you are making repairs in between tenants the property is not depreciating. You’d be writing off other items during this period.

Amortization
Amortization is like depreciation, except that you only amortize intangible expenses, the largest cost typically associated with the fees paid in connection to obtaining your loan.

If you are taking out a mortgage on a rental you are buying, you will most likely pay the following loan fees: appraisal, credit check, maybe a flood certification, origination fees, and upfront points.  You must sum those fees and then amortize them over the life of the loan. Again, it is not a one-time cost like depreciation, but a small write off each year. Plus, this is the biggest mistake most investors make. They forget to even do this all together, missing this great deduction opportunity.

If you were to refinance later, any loan fees associated with the old loan, not yet written off via amortization, get to be written off in full. Then you amortize the new loan fees incurred during the refinance.

Interest
Any interest expenditures that you have incurred which are associated with capital used to buy rental real estate are classified as deductions.  Therefore, if you are using a mortgage company, they will send you a Form 1098 at the end of the year detailing how much interest you had paid them over the course of the year.  Your CPA/Tax Advisor will use this form to prepare Schedule E. Make sure you are getting these write-offs.

Maintenance and Repairs
Remember when I spoke before about the depreciation breaks when you are maintaining the property? This is where you’d have the option of making up that cost. The cost of repairs to rental property (provided the repairs are ordinary, necessary, and reasonable in amount) are fully deductible in the year in which they are incurred. Good examples of deductible repairs include repainting, fixing gutters, HVAC unit service, floors, fixing leaks, plastering, and replacing broken windows.

Here’s the basic rule from the IRS: It will be expensed as an improvement if it

  • makes a long-term asset much better than it was before
  • restores it to operating condition, or
  • adapts it to a new use.

In contrast, expenses you incur that don’t result in a betterment, restoration, or adaptation are currently deductible repairs. So as a rule of thumb, you need to patch, mend, and make do – don’t replace!

 

Personal Property
The cost of personal property used in a rental activity can usually be deducted in one year using the de minimis safe harbor deduction (for property costing up to $2,000) or 100% bonus depreciation which will remain in effect for 2018 through 2022. Such personal property includes appliances or furniture in rental units, and gardening equipment.

Home Office
With 2020 came Covid and truly a new way of conducting business. With more and more offices moving away from the daily commute to working from home, a home office is a big new opportunity for so many individuals. In order to claim a home office as a business expense for investment purposes, you must either be running a business (managing other property) or own your own rental property. You must also use the home office exclusively and regularly for business purposes and it must be your business’ principal place of business.  Your office space can be either a stand-alone desk in a designated room, or a corner desk designated area of an otherwise non-business room.

Transportation
Once you have an office space in your primary place, travel and transportation costs can be highly beneficial from a business to a business location. Your home office becomes a business as does your rentals. Therefore, the IRS gives you transportation costs for this.

Note: to ensure it stays as a business day, you must conduct 4 hours minimum of work per day. So keeping a schedule and calendar will help if the IRS was to question anything.