5 Tax Deductions For Real Estate Investors

by Lance Ekum on · 0 comments

Everyone’s least favorite season of the year is probably the tax season. This time of the year is even more frustrating to businesses and investors who had a lot of transactions in the past year. Not to mention that different investments often require different treatment in taxes, as well as in tax deduction.

Real estate investment is one of the costliest and hardest investment sectors. To be able to make a profit in investing in real estate, the investor must make a lot of effort such as traveling to the property, preparations, and maintaining it in a good condition. One of the hardest real estate investment is the rental real estate, which requires active management in order to meet the needs of tenants living in the property of the landlord.

When paying taxes for a rental real estate property, the investor can minimize his or her income tax liability using various tax deductions. There are various Rental Property Tax Deductions available for landlords to use in order to save money in paying for taxes. Here are the five most common tax deductions that property owners can claim when filing their income tax.

1. Mortgage Interest, Unsecured Loans, and Credit Card Interest

If the real estate property is under a mortgage, the amount of mortgage interest paid for the year can be treated as a deductible expense. However, only the interest can be treated as such and not the principal payment. In addition, interest from unsecured loans (or loans that doesn’t require collateral) used to buy the rental real estate property can also be treated as a deductible expense. Interest paid for any credit card used for your business also falls to this category.

2. Depreciation

Real estate properties are known to appreciate in value over time, especially land. Buildings, on the other hand, can also appreciate in value, but its physical parts like the roof, the window, and doors decrease its value over time. These parts lose value because of the tear and wear that happens during its everyday use. Depreciation tracks the loss in value of these things. All real estate properties excluding land depreciate.

Each year, the owner depreciates the loss of value in the cost of the property and will continue to do so until the end of its useful life. For example, a $300,000 worth of house that has an expected useful life of 20 years will need to depreciate its value at $15,000 ($300,000/20) per year. This $15,000 can be used as a tax deduction.

3. Repairs, Maintenance, and Cleaning Fees

The cost of spendings used in the rental real estate property for repairs, maintenance, and cleaning, can be treated as a tax deduction. This is because these spendings are used for the business and to generate income. However, the repairs, maintenance, and cleaning fees that can only be deducted are those used within the year.

The cost of an improvement in the property (e.g. replacing the roof for a better one) will be depreciated for its useful life. These improvements also increase the value of the property. While repairs, maintenance, and cleaning spendings can be claimed at full at the same year tax year it was performed, improvements will be claimed every year until the end of its life span.

4. HOA Fees

The Homeowner Association or HOA Fee is a fee paid monthly by homeowners to assist in maintaining and improving properties in the association, according to Investopedia. If the property is used for private use, such as for residence or any other private purpose, HOA fees cannot be claimed as tax deductions.

However, if the property involved is being rented out, the HOA fees can be claimed as tax deductions. Moreover, if the property is used for private use earlier in the year and the owner decided to rent it out later, only the rented out portion can be claimed.

5. Property Taxes and Insurance

House insurance and property taxes that are in relation to the rental real estate property can be classified as a tax deduction. However, when the rental property is purchased with conventional financing and is paying monthly into an escrow account, these expenses cannot be claimed. The reason or this is because payments into escrow accounts are not deductible. Only those payments made out of escrow are good for tax deductions.

Lance writes stories from his heart, aiming to inspire and motivate, as you align more fully with YOUR true peak. When he's not here, you can find him hanging out with his family, riding a bike, or just generally acting goofy.   Sign up for the Thoughts from the Treehouse newsletter and get additional inspiration in your email inbox!
Lance Ekum
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