By: Pamela Martinez, JBS Corp
You’ve educated yourself on the few things you should know before investing in real estate property and decided it’s the investment route for you. With tax season quickly approaching, you need to get the most out of your refund by not missing these deductions.
Startup Cost
For those of you who have recently started their journey as real estate investors, you may be able to deduct a portion of your startup expenses. According to the IRS, new business owners can deduct up to $5,000 in their startup and organizational costs. These expenses could include (but are not limited to) additional training and education, insurance, licenses, and acquiring furniture. Startup costs that exceed $5,000 are to be amortized at 15-years. This means that the remaining expenses can be deducted in portions throughout 15-years.
Depreciation
The IRS defines depreciation as a capital expense that “is the mechanism for recovering your cost on an income-producing property and must be taken over the expected life of the property. “In other words, depreciation represents what proportion of an asset’s (in this case, properties) value has been worn-out or lost over time. Since land tends to appreciate over time, the IRS only allows depreciation of the physical construct. Therefore, the land value must be deducted from the purchase price before depreciation. (i.e., the property is purchased at 500k, land value is 100k, only 400k is depreciated)
Travel and Transportation Expenses
The monies spent while inquiring about a new property, including airfare, meals, hotels, rental cars, and other travel expenses, are tax-deductible. Travel expenses and miles incurred on a vehicle while traveling to show your property to prospective tenants can also be deducted.
Marketing/Advertising Expenses
Once your investment property is ready for tenants, you will have to get the word out to attract people to your listing. A common practice is via ads and listings on websites such as Realtor and Zillow. Unfortunately, these advertising expenses can be sickishly high. But luckily for you, any cost deemed ordinary and necessary for your business is tax-deductible, including those incurred from marketing and advertising your property.
Utilities, Repairs, & Maintenance
utilities (e.g., water, cable, gas/electric), repairs, and maintenance paid for by you, the landlord, are tax-deductible. It is not uncommon for landlords to cover these expenses so that the burden of doing so does not fall on the tenant. But, if records are kept diligently, even the utilities, repairs, and maintenance expenses paid for by the tenant can be tax-deductible as well. The most commonly missed deductible expenses in this section are light bills and water bills paid for by the landlords, don’t let that happen to you.
Interest
Any interest incurred through loans, credit cards, mortgages, etc., can be tax-deductible. Of course, that is if you’re not commingling funds, and the money was used for improvements/repairs on the real estate property. In other words, the interest on credit cards/loans obtained to improve or fix the home is tax-deductible.
Home Office
The IRS details how the home office deduction works; As a real estate investor, your business operates out of your home, and you are considered self-employed. Meaning, all the office equipment you’ve purchased is eligible for a take deduction.
A best practice to ensure you have all the information necessary for your real estate investing business’s success is to establish a sound recordkeeping system.
