How Owning Rental Property Puts Cash in Your Pocket!

How to Maximize Your Tax Deductions - Ten Top Tax Tips!
Do you dread tax time? You don’t have to. Most real estate investors actually look forward to April 15th. Why? Because despite the current condition of our housing and mortgage industries, real estate provides more tax benefits than almost any other investment. And maximizing your tax deductions only makes good business sense. That being said, let’s take a look at 10 of the best tax deductions available to you as an owner of investment property.

1.Mortgage Interest
Interest might be your single biggest deductible expense. Common examples of interest that landlords can deduct include mortgage interest payments on loans used to acquire or improve rental property and interest on credit cards for goods or services used in a rental activity. (Any points or closing costs paid on a mortgage loan secured by an income-producing property are also deductible.

2.
Depreciation
Depreciation is the loss in value of an asset or building over time due to wear and tear, physical deterioration and age. The IRS allows you to depreciate income-producing properties over their useful life (27.5 years for residential and 39 years for commercial). You’ll be thankful every year at tax time if you use depreciation correctly.
 
3.Insurance
You can deduct the premiums you pay for almost any insurance for your rental activity. This includes fire, theft, and flood insurance for rental property, as well as landlord liability insurance. And if you happen to have employees, you can deduct the cost of their health and workers’ compensation insurance.

4.
Homeowner’s Association (HOA) Dues
Yep, that’s right. If you own a real estate investment property within a subdivision that charges those annoying quarterly HOA fees, you can write those off your taxes.

5.Repairs
The cost of repairs to rental property is fully deductible in the year they are incurred. Good examples of deductible repairs include repainting, new flooring, fixing leaks, plastering, and replacing broken windows.

6.Personal Property

This include such items as furniture, appliances, lawn mowers, snow removal equipment, etc. which are not permanently attached to the land.

7.
Home Office
Provided they meet certain minimal requirements, you may deduct your home office expenses. This deduction applies not only to space devoted to office work, but also to a workshop or any other home work space you use for your rental business.

8.
Travel
Landlords are entitled to a tax deduction whenever they drive anywhere for their rental activity. For example, when you drive to your rental building to deal with a tenant complaint or go to the hardware store to purchase a part for a repair, you can deduct your travel expenses.  And believe it or not, you can even deduct your long distance travel! If you travel overnight for your rental activity, you can deduct your airfare, hotel bills, meals, and other expenses. If you plan your trip to Las Vegas carefully, you can even mix business with pleasure and still take a deduction!

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 person or maintenance guy.

10.
Legal and Professional Services
Finally, you can deduct fees that you pay to attorneys, accountants, property management companies, real estate investment advisers, and other professionals. You can deduct these fees as operating expenses as long as the fees are paid for work related to your rental activity.

Take a Bite out of Taxes!  Use Depreciation to Keep a Bigger Portion of Your Income:

Whether it’s a single family house, an apartment building, a commercial strip center, or a downtown high-rise, buildings don’t last forever. They are made of wood, concrete, glass, drywall, and other materials that slowly degenerate.

Realizing this, the IRS allows you (as the owner) to deduct an amount every year to recover the loss of your real estate investment. This is called DEPRECIATION!

Only property held for business or investment purposes can be depreciated. In other words, you cannot depreciate your own home. In addition, only the buildings (which are referred to as the “improvements”) can be depreciated; the actual land cannot be depreciated. Consequently, it is necessary for you (or your CPA, actually) to segregate the value of the land from the building.

Let’s look at some numbers to demonstrate this: Let’s say you purchase a single family house for $200,000 as an investment. The improvements (the house itself) are worth $150,000 and the land is worth $50,000. So you would depreciate the $150,000, but not the $50,000.
 
So how does this look on your actual tax return? Is the $150,000 deduction spread out over a number of years? And if so, is it spread out evenly? The answers are yes and yes.

Residential property must be depreciated over 27.5 years, while commercial investment property is depreciated over 39 years.  Anything over 4 units is considered to be commercial. It is possible that 4 units or less could be considered commercial if located in a commercial zone. Even a single family home could have a commercial consequence in that type of setting. Also, less than 5 units could be commercial when one of the units is a store front, business, etc.  
 
In the case of this real estate investment property, you would divide the depreciable amount by 27.5 years (because it is residential):

Value of Improvements ÷ Depreciation Period = Annual Depreciation
$150,000 ÷ 27.5 = $5,454
 
This means you can literally deduct $5,454 from your taxes EVERY SINGLE YEAR!
 
That’s right. The $150,000 is divided into equal amounts ($5,454) over the 27.5 years. This equal amount is deducted from your taxes each year until the asset has been fully depreciated. This is called the straight-line method of depreciation, and using it can get you a whopping tax refund every April!

Depreciating an Appreciating Asset
The real beauty of depreciation is that real estate is considered to be an appreciating asset. In other words, it goes up in value over time. After all, they’re not making any more of it. So while your investment property is appreciating--or going up in value--on paper its value is going down because you are depreciating it.
 
Is This A Great Country, or what?
 
Real estate has many tax deductions. But of them all, depreciation is the most powerful. Talk to your CPA about depreciation. Come tax time, you’ll be glad you did. 
 
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 Las Vegas Realtor Linda Strasberg, Real Estate Specialist

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