TAX DEDUCTIONS FOR INVESTORS IN THE USA

 TAX DEDUCTIONS FOR INVESTORS IN THE USA

As a real estate investor in the United States, you have unique potential.

Not only to build a diversified and prosperous real estate portfolio in the world's leading economy.

But you'll also benefit from tax tools and strategies used by the world's richest people.

That is to say a wide range of tax deductions.

This will therefore have a significant impact on your overall financial situation.

This comprehensive guide has been meticulously crafted to provide you with 11 rental property tax deductions to help you maximize your returns.

Get ready to discover the secrets every savvy investor should understand, so you can make the most of every opportunity that comes your way.

US tax deductions

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Mortgage interest.

Mortgage interest expense allows rental property owners to deduct the interest paid on a loan taken out to purchase, construct, or improve a rental property.

Your mortgage company will send you a Form 1098 detailing exactly how much interest you paid during the year, and you can deduct that amount from your taxable income. You can deduct the total interest, but not the money paid toward the principal.

Rental property owners are not subject to a cap on the amount of debt for this deduction, unlike owners who itemize this deduction on their primary residence.

Property tax

The good news for landlords is that this tax is deductible from your rental income.

If you have a mortgage on your rental, property taxes are typically included in your monthly mortgage payment.

Property taxes are calculated based on the assessed value of the property and the total amount can vary from year to year.

The local government or lender will notify you of any changes in your property taxes that affect your mortgage payment and the amount you can deduct from your rental income.

Depreciation of rental property

Like any residence, from an accounting point of view rental properties lose value over time due to wear and tear from use or obsolescence.

The IRS allows homeowners to deduct a portion of the property's cost each year as depreciation expense if the property meets these requirements:

The property is used for commercial purposes or for an income-generating activity.

The property has a determinable useful life (meaning it wears out, decays, depletes, or loses its value due to natural causes).

The property will last for more than a year.

The property was not put into service and was no longer used for commercial purposes during the same year.

Depreciation applies only to the real estate structure and improvements made to it.

The land is not depreciable since it is never exhausted.

Depreciation on residential rental property is calculated evenly over 27.5 years (the period the IRS considers the property's "useful life"). This means your annual deduction is 1/27.5 of the property's cost.

Improvements to the property, such as a new roof, are also deductible for depreciation if they meet the requirements.

It's important to note that the rental property tax deduction is a deferred benefit. If you sell your property for more than its depreciated value, you'll have to reclaim depreciation taxes on that profit.

To avoid this, savvy real estate investors use the “1031 exchange.”

This simply allows you to defer the product and the taxes due to another investment property.

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Corporate expenses

Owners can deduct their business operating expenses to reduce their total taxable rental income.

To qualify for a tax deduction, the expenses must be considered ordinary and necessary, meaning they are common in the real estate industry and necessary for the operation of the business.

Here are some fully deductible common expenses for residential rental properties:

Advertising and Marketing

Property management company fees

Garbage collection

Antiparasitic

Rental fees or commission fees

Landscaping

Equipment rentals

Insurance

Homeowners typically have insurance to protect their assets in the event of property damage or other potential losses.

Fortunately, these insurance premiums are tax deductible for rental property owners.

Premiums for homeowner's insurance, flood insurance, eviction insurance, and any other coverage you have on your rental property are eligible for a tax deduction.

Repairs and maintenance

Rental property repair and maintenance costs can be tricky when it comes to tax deductions. Regular maintenance or repairs, such as changing air filters or fixing plumbing issues, are fully deductible for landlords.

However, if you do work that increases the property's value, such as installing new flooring or a roof, this is considered a major improvement. Capital improvements are not eligible for a maintenance and repair deduction. These costs can be recovered through a depreciation deduction.

Property-related charges (utilities).

Expenses such as water, gas, electricity and internet for rental properties are deductible.

On the other hand, if tenants cover some of their utilities, you can only deduct the expenses you pay.

Depending on your situation, it may be worth increasing your rent and covering more of these costs to benefit from more deductions on your rental property income.

Legal and professional fees

If you use software or consult a professional to help you run your business, these expenses are deductible.

Here are some examples of common legal and professional fees for landlords:

Fees for a CPA to file your taxes (accountant).

Attorney fees for drafting rental agreements or other legal documents

Legal fees or application fees to evict tenants

Homeowners Association Fees (HOA Fees)

If your rental property is owned by a homeowners association, you will have to pay fees to operate the association.

However, you can deduct these expenses to reduce your total taxable rental income.

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Travel and transportation

All expenses associated with traveling to or from your rental or travel for business purposes are tax deductible.

Here are some examples of when you might be traveling for business and qualify for a tax deduction:

Show the property to potential tenants

Collect rental income from the property

Meeting with a contractor on site (craftsman or other person working on the property)

You can claim this deduction using the IRS's standard mileage deduction rate. Record your trips with the date, purpose of the trip, and distance traveled if you drive.

The offices

Whether you operate your rental business out of a home office or another building, you can deduct office-related expenses from your rental income.

This includes office supplies, energy or water expenses, and the cost of space. The IRS offers a simplified home office deduction that can make it easier to calculate and claim on your tax return.