If we ask any real estate investor about the best part of investing in property, we bet they would say the investment property tax deductions!
Frankly, that is true. The best way to make money in real estate is to actually cut on expenses. Now, imagine above all the other rental costs, a real estate investor must pay taxes in full. Well, that does not leave much for a profit, obviously. However, property tax deductions are what makes real estate investing the best money-making opportunity compared to other forms of investing.
Related: Our Selection of the Top 6 States with Lowest Property Taxes
This article is dedicated to every beginner real estate investor who is looking to learn about property tax. So, regardless of whether you are buying an investment property or even selling an investment property of yours, this guide will come in handy. Therefore, we would like you to read it all the way through, and, of course, share your thoughts and comments down below!
To start off, we are not talking about an income tax that applies to other occupations. Real estate investors pay taxes on their rental properties in a different way. One thing to keep in mind is that it might seem like too many taxes, but it is worthwhile with the investment property tax deductions that apply to every form of taxes they pay. So, here is what you need to know:
Investment property tax deductions when buying an investment property
When buying real estate, there are a few tax deductions that apply. Of course, these deductions also include owning the rental property. So, let us take a look at the tax benefits that apply to rental properties:
Casualty losses
Casualty and theft are cases when investment property tax deductions apply. Therefore, if your rental property gets broken into, you can get a tax benefit on that sum of money.
Repairs and maintenance
Repairs are different from maintenance. As for repairs, they are things that need fixing due to a damage. On the other hand, maintenance is something that you do regularly. For example, if the faucet breaks, that is repairing and it adds up to your rental expenses which are subject to deductions. But, if you hire someone to clean the rental property or maintain the facilities, that is considered maintenance. Either way, it is subject to investment property tax deductions.
The reason we differentiate between repairs and maintenance work is the number of tax deductions you apply for. In case of maintenance, you are less likely to exceed the maximum amount that is set by the IRS. In case of major repairs, you are more likely to exceed the amount, and, therefore, you can apply for the tax deduction in more than one year.
Depreciation
Appreciation is what drives many investing decisions for real estate investors. In basic terms, it means that the property experienced an increase in value over time. However, when the property experiences a decrease in value, we call that depreciation. Even though investment property tax deductions apply here, you still have to consult with your accountant.
Travel costs
Obviously, for those real estate investors who choose to invest out-of-state, there are the travel costs that come with the business. Luckily, those, too, are subject to investment property tax deductions. Therefore, keep all the records of your traveling and give them to your accountant or financial manager.
Related: Buying a Rental Property Out of State: Pros and Cons
Property management fees
Professional property management is a great option for those who do not wish to handle the stress of rental properties. Still, the major concern is the property management fees that an investor needs to cover. The good news is that they are also subject to tax advantages. So, you can go ahead and write them off.
Mortgage interest
The major concern for many real estate investors is the mortgage. What makes it even more cumbersome is the fact that you are not only paying for what you’ve borrowed but also an interest. That is, in fact, where investment property tax deductions come in handy. You can actually write it off and, sure enough, use that to your advantage in growing your real estate investment portfolio.
Other fees
Other deductible fees include professional fees. Those are the ones you pay for legal services as well as accounting amongst other fees. Also, there is the property tax as well as the communication services fees. Communication services include any service such as cable, the internet, or other devices for business purposes.
One thing to keep in mind, though: investment property tax deductions also include a second home. By this, we mean those who invest in Airbnb or other forms of short-term rentals. As long as your property is used as a rental property for at least 14 days a year, it is considered an investment property and is tax deductible.
Investment property tax deductions when selling an investment property
It is a great thing to know that even when you are selling real estate, there are tax deductions that apply too. These deductions come in the following forms:
Basis
The basis tax benefit applies to the actual worth of your investment property. So, it is merely how much you’ve paid for your property. Now, why is that important? It is important for you to know how much the property cost. This also includes all the other costs such as the agent’s fees and the closing fees. However, the basis could increase your tax liability in some cases and increase the tax deductions in other cases. For example, if you apply major improvements, the tax liability increases as does the basis. Meanwhile if your property decreases in value due to a natural disaster, this increases the amount of investment property tax deductions.
Capital loss
When selling real estate, you are expected to pay capital gain taxes. However, what if you experience a loss when selling the property? Well, that is what we mean by a capital loss. Still, it depends on how long you’ve owned the property. If you owned it for a year, it makes it a short-term loss. On the other hand, if you owned it for more than that, it is considered a long-term loss.
The amount of tax deduction on this type of loss is around $3,000 a year or half that amount if you have a spouse and are filing taxes separately. If the amount of loss exceeds this limit, you can always file for investment property tax deductions in the following years.
Passive losses
The easiest way to describe passive losses investment property tax deductions is negative gearing. So, basically, it is when you are investing for capital gain rather than for rental income. As a result, you end up charging for rent less than what you actually need to cover your property expenses, leading to negative cash flow. But there is a limit to the amount of tax deduction you can apply for. In case the amount exceeds the limit, you can apply for it in subsequent years.
Related: Positive Gearing and Negative Gearing in Real Estate Investing
Finally
We wrote this article because investment property tax deductions are an important matter to address. It is one of many ways that help investors make money in real estate. So, go ahead and sign up for Mashvisor to find out more about how we can help you with your property business!