Every real estate investor knows that investment property provides more tax benefits than almost any other investment. Therefore, maximizing those tax deductions only makes good business sense.
Let's take a quick look at the most important tax deductions available as an owner of investment property:
1. Mortgage Interest
Your largest deductible expense is likely to be interest. There are two types of interest that you can deduct. The first is mortgage interest from any mortgage loan on the property. This includes Home Equity Lines of Credit (HELOC) and other loans secured by your property. The interest deduction applies to any of these loans provided that they were used to acquire and/or improve your investment property.
Additionally, credit card interest can also be deducted for goods and services used in the operation of your rental property. Closing costs and points paid by you to close on your mortgage loan is also deductible.
2. Depreciation
Depreciation is simply the loss in value of your income property over time due to physical deterioration, age, and normal wear and tear. Fortunately, the IRS allows you to depreciate income properties over their “useful” life. This is defined as 27.5 years for any residential property (1 to 4 unit properties) and 39 years for commercial properties. Depreciation can provide you a significant and welcomed deduction every tax year!
3. Insurance
Premiums paid for insurance policies are tax deductible expenses too. This includes, but is not limited to, fire, theft, flood, and landlord liability insurance. Also, health and workers' compensation insurance for your employees (if any) can also be deducted.
4. Homeowner's Association (HOA) Fees
Many investors miss this easily overlooked deduction. If you own real estate investment property with HOA or POA fees, they can be written off your taxes too.
5. Personal Property
Items such as appliances, furniture, lawn mowers, snow removal equipment, etc. which are not permanently attached to the property or land can be depreciated according to varying schedules. This is not the same as the property depreciation above, and you should consult your tax advisor to properly deduct these items.
6. Repairs
Repairs to your investment property can be deducted in full, but only in the year they are completed. Common examples include repainting, re-flooring, broken windows, and fixing leaks.
7. Home Office
Any space in your home used towards your rental business can be deducted provided they meet certain minimum requirements. Typically these areas are home office expenses and workshop space.
8. Travel
Travel expenses are tax deductible provided they are related to your rental business. Examples include travel to and from your property for tenant or repair related activities, as well as travel to the hardware or other stores.
If you have to travel long distances for your rental business, you can deduct your travel expenses such as airfare, hotel, meals and other related expenses.
9. Employees and Independent Contractors
Whenever you hire anyone to perform services on your investment property, you can deduct their wages as a rental business expense. This is true whether the worker is an employee (for example, a resident manager of an apartment complex) or an independent contractor (for example, a repair or maintenance person).
10. Professional and Legal Services
Finally, you can deduct fees that you pay to property managers, attorneys, accountants, real estate investment advisors, and all other professionals. As long as the fees are paid for work related to your rental business, you can deduct those fees as operating expenses.
As always, remember to consult a competent tax advisor to help you maximize all your available deductions.
