One of the key benefits for real estate investors is the added tax deductions that come from investment property ownership. As is always the case, though, tax rules and regulations can be somewhat confusing and daunting for those who are not experts.
For our trust deed borrower clients, we wanted to offer a few tips for investment property tax deductions in which real estate investors can take advantage.
- Common Expenses--Most common expenses associated with real estate are deductible. These include: taxes, insurance, tax preparation, lawn care, losses from disasters or theft.
- Repairs versus Improvements--This is an area that trips up many people. If you make repairs to keep your property in good condition then that is a deductible expense. However, if you make an improvement to the property that adds value, it is not deductible. Those improvement costs need to be recovered through depreciation.
- Home Owner Association Fees--This often overlooked expense is deductible. If your investment property has HOA fees, deduct them.
- Condominium Association Expenses--In addition to the association fees, if the Condominium Association made repairs to common areas for which you received a charge for your percentage of ownership, then that charge, just like repairs on a single family home, are deductible. However, also similar to single family homes, improvements are not deductible.
- Travel Expenses--If you incur costs associated with travel to collect rents or to make repairs to maintain your property then that expense is deductible. You can either deduct the actual costs or use the standard mileage rate.
- Mortgage Deductions--There are two things here that need to be realized when it comes to mortgage deductions. First, expenses associated with obtaining the mortgage (appraisals, commissions) are not deductible all at once. They must be amortized over the life of the mortgage. Second, your entire mortgage payment is not deductible. The only portions that can be used as investment property tax deductions are the interest payments that are made. Lenders who do their own servicing (or third party servicers) will break out for you the portion of your payments made throughout the year that were interest payments (as opposed to principal) on Form 1098 at the end of the year.
Obviously, the best bet is to consult with a tax professional (whose fees may be deductible!) before making any decisions about your taxes. As we stated in the beginning, tax laws can be confusing and ignorance of the law is not a defense if you make a mistake.