Write it off! The tax deductions available in the real estate market are a desirable aspect of being a landlord. Successful investors take full advantage of these deductions to attain the best return on each investment dollar. real estate investors need to know these deductions and make property management decisions based on these tax benefits. Talk to a CPA to guide you about your real estate portfolio’s specific details, so you are not missing out on any of these and many other legal deductions!
There is a payoff for investors who take the time to pursue every deduction and direct the extra funds towards purchasing more investments. They are growing even more wealth through the savings realized. We will cover five deductions real estate investors need to know about in 2021.
Depreciation, the amount of value the property becomes reduced due to wear and tear over time, is another deduction real estate investors need to know. Depreciation is deducted over 27.5 years using a specific formula for residential property values. Unlike maintenance or repairs, any voluntary improvements made to the property would fall under this formula. These deductions can reduce your tax liability by hundreds or possibly thousands. The best part, nothing is coming directly from your wallet to avail yourself of this benefit.
A lesser-known deduction real estate investors should know segmented depreciation requires more complex paperwork, but it may well be worth the effort for many. These are additional deductions for the wear and tear of any fixtures and appliances spanning up to 15 years. While depreciation is customarily divided by 1/27 for each tax year, this method is splitting the property into segments that depreciate at varying rates and could save you more money.
While you may not deduct the principal paid on the mortgage or the expenses involved in attaining your mortgage, deductions real estate investors need to know the amount paid towards the interest is deductible through itemization. If part of your payment is going into escrow towards your property taxes or insurance, your mortgage company should provide an annual statement. The Tax Cuts and Jobs Act of 2017 introduced nearly double the standard deductions, with an upper limit on the mortgage amount you can claim this deduction for, dependent upon your filing status.
Maintenance and Repairs
Properly maintaining property includes making repairs swiftly to keep small issues from becoming substantial renovation projects. Regular upkeep such as painting, lawn care, plumbing, or electrical problems are expenses that real estate investors need to know they may deduct. Unlike Depreciation which is a delayed deduction, an investor can take these deductions for the tax year they made the repairs. You must categorize repairs and improvements properly on your return due to the vast difference in how you receive the benefit. Commonly used questions can help you determine if you are improving or rehabilitating the rental property or if the cost falls under repair guidelines. Investors may also deduct interest for loans to improve the property. There are specific guidelines and limits to this deduction as with mortgage interest.
Are you working out of a home office? real estate investors need to speak with a tax advisor about the office’s use and the home’s percentage this delegated space occupies. Investors can write off any fees paid towards hiring a management company. Qualifying meal expenses incurred to manage your investment properties as well as travel expenses. These expenses can include driving to the property to collect rent or other business trips, near or far. Should you pay utilities without reimbursement from the tenants, this expense is also deductible, as are losses from natural disasters, for expenses not covered by insurance. You may even take a deduction for legal fees for evictions are also deductible.
The standard deduction from the Tax Cuts and Jobs Act of 2017 is frequently higher than individually itemized deductions, so many homeowners do not need to itemize. Because you do not need to have any expenditures to take the standard deduction, you may not have even had to pay any expenses out of pocket yet still receive the benefit!
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