Real Estate Investor Tax Expenses

Real estate is one of the most popular investment strategies in California. It is a great way for real estate agents and real estate related investors look for protecting and growing one’s wealth. Real Estate Rentals or Real Estate Flipping both have different approaches when it comes to tax write off’s. We are going to focus on the Real Estate Rental tax write off’s as I have been asked more questions in regards to rental write offs. The key to remember in any business, is that all expenses must be ordinary and necessary.

The IRS lets you deduct ordinary and necessary expenses required to maintain the property that you rent to others, even when the property is vacant, as long as you’re trying to rent it.

What are the best Real Estate Rental Tax Deductions?

• Deduction
• Depreciation

These are the top 2 tax deductions that benefit an investor each year.

Deduction

Deductions are qualified expenses used for your rental business in the year they are paid. Wait, what is a qualified expenses and aren’t all expenses qualified. No, not all expenses are treated equally for tax purposes. An example on a non-qualified expense would a personal car purchase that is used 10% of the time to visit the property.

As the property manager you can deduct the ordinary and necessary expenses for managing, conserving, and maintaining the property. Generally yearly expenses include mortgage interest, property taxes, advertising, maintenance, utilities and insurance. Because repairs keep a property in good condition and do not add value to the property, investors can write off repairs. Examples include fixing leaks, painting, and replacing broken parts of the rental property. Caveat, large repairs can be considered a capital improvement. Check with you local tax professional if the repair was a substantial expense for clarification on how to categorize it.

Tip: It’s important that real estate investors itemize deductions carefully. Owning your business, deductions can come in other forms. Such as using your home office. In many cases, you can deduct a portion of their home working expenses such as Internet, phone bill, office lease, and printer expenses.

Types of most common Rental Property Qualified Expenses

• Advertising
  • Advertising expenses include rental signs and marketing the rental unit on sites (including social sites). If you are your own marketer and purchase a camera that is ordinary and necessary used for the purpose of rental marketing photography, it can be a qualified expenses.
• Auto and travel expenses
  • Travel expenses must be specific to the rental property. Documentation is highly recommended to provide proof when audited. Documentation should at a minimum provide information that shows date, mileage, who you met, and description of travel reason.
    i.e. 10/11/2020 – 10 miles travel by car maintenance service with ABC contractor.
• Cleaning and maintenance
  • Cleaning and Maintenance expenses include expenses incurred when the unit is turnover to a new tenant.
• Commissions
• Depreciation
• Insurance
• Interest (other)
• Legal and other professional fees
  • Legal and other professional fees include fees paid to lawyers, bookkeepers, accountants, and tax preparers.
• Local transportation expenses
• Management fees
  • Management fees include all payments made to a property management company that manage the property.
• Mortgage interest paid to banks
  • Mortgage Interest
  • Refinance Fees and Mortgage Points: Classified in Assets/Depreciation section instead of the expense section. The IRS considers them “amortizable intangibles”. Basically, they are expensed over the projected life of the asset (amortization).
• Points
• Rental payments
• Repairs
  • Repairs expenses can be a little difficult to categorize. Typically you want to record all repairs expenses that are incurred to keep the property assets in proper working order. Large repairs should be categorized under the depreciation expense if it will improve the property and extend the useful life of the assets.
    i.e. Roof patch repair is a repair expense. Roof repair, if repairing a large portion of the roof can be consider a asset improvement and will need to be depreciated.
• Taxes
  • Tax expenses include property taxes and other related tax expenses.
• Utilities
  • Utility expenses include utilities that are paid by the owner. If the tenant pays utility bills, then the owner can not claim it as an expense.

Depreciation

Depreciation are large expenses or improvements that will be spread over a number of years. Say that again. A depreciation is a form of spreading a large capital improvement expense over a period of time, usually numerous years.

For example, installing a new Air Conditioning unit. If the air conditioner were to break down and you are looking to replace it. This service is not a repair and instead is a capital improvement. A air conditioner installation in California averages around $7,000 and the IRS depreciation table indicates that this asset must be depreciated over 27.5 years. Which really means, you paid $7,000 this year, but the IRS only lets you expense $254 this year and $254 the other 26 years.

The Taxable Numbers:
+ Rental Income: $12,000 ($1,000 per month)
– Utilities: $1,200 ($125 per month)
– Taxes: $1,200 (Annual property tax)
– Insurance: $1,200 ($125 per month)
– Depreciation: $254 (A/C Depreciation)
= Taxable Profit: $8,146

Your Bank Numbers:
+ Rental Income: $12,000 ($1,000 per month)
– Utilities: $1,200 ($125 per month)
– Taxes: $1,200 (Annual property tax)
– Insurance: $1,200 ($125 per month)
– A/C Installation: $7,000 (A/C installation)
= Annual Profit: $1,400

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