10 tax benefits
The IRS gives property investors multiple ways to write off rental expenses in order to reduce your taxable income. DON'T pay more taxes than you need to. Have a tax strategy in hand to help grow your passive income portfolio. As with everything else in the tax world, KEEP GOOD ACCOUNTING RECORDS on everything you deduct. Here are the top 10 common tax deductions you can write off!
1. Repairs & Maintenance
Repairs & Maintenance are fixes that are deemed "ordinary and necessary" for the business property to function.
They are fully deductible in the year in which they are incurred.
2. Mortgage Interest + Credit Card Interest
This is one of the BIGGEST expense deductions.
You can deduct mortgage interest payments on loans used to acquire or improve rental property.
You can deduct interest payments on credit cards for goods or services used in a rental activity.
3. Property Taxes
This is another BIG expense deduction. This can range anywhere from a few hundred dollars to hundreds of thousands!
4. Utilities
If you as the landlord pay for things like gas, electric, water, heating and AC for your tenant, they will ALL be tax deductible.
5. Depreciation
It's a complicated topic but understanding it will help you save $ increase your cash flow.
Simply put - you can write off the cost of your assets over it's "useful life", your cost is spread over the total amount of years deemed as it's life. For example: refrigerators and stoves are depreciated over 5 years. If it cost you $500, you get to write off $100 a year until the 5th year.
You can increase the depreciation deductions received the first few years rental ownership by using cost segregation.
Cost segregation is a tax strategy that has been used successfully for years to help property owners lower their tax liability by accelerating the depreciation on fixed assets by properly identifying every component of that building as preferred by the IRS.
6. Insurance
You can deduct your insurance premiums for the property along with the insurance cost for your employee's health and worker's compensation.
7. Travel
You can write off your travel expenses for the purpose of repairing your property, this includes airfare, lodging, and auto.
8. Legal and Professional Services
Common fees include: fees paid to to attorneys, accountants, real estate business advisors
You can deduct these fees as operating expenses as long as the fees are paid for work related to your rental property. For example: if you paid legal fees to to acquire your property, they must be added to the basis of the property asset and depreciated.
9. Qualified Business Income Deductions (aka QBIDs aka Section 199A)
This is a new "pass-through" tax deduction that started in 2018 established by the Tax Cuts and Jobs Act. This is unique in that it is not considered a rental deduction like the other items discussed above, but rather an income tax deduction (provided you qualify).
In general, you may able to deduct:
Up to 20% of your net rental income
OR 2.5% of the initial cost of your rental property + 25% of the amount paid towards employees (if any).
This deduction will expire in 2025
10. Employees + Independent Contractors
You can deduct wages paid to employees or independent contractors who performed services on your rental property.
Did You Know?! (In the Words of Bill Nye, The Science Guy..."NOW YOU KNOW"!)
Cost Segregation can help you increase depreciation deductions in the first few years of owning your rental property. With careful planning you may be able to deduct the cost of improvements in a single year.
Most will be able to deduct up to $25,000 in rental property losses each year.
Renting to family and friends - co-mingling business with personal will essentially disqualify your business tax deductions. You CAN'T have it all! But you can be smart about your tax strategy.
You can deduct wages paid to employees or independent contractors who performed services on your rental property.