Everyone knows the government will always get their tax money one way or another. That doesn\’t mean you have to automatically turn over a higher percentage of your real estate investing profits than the law requires. With good property management, you may be able to be entitled to substantial income tax deductions that help to increase your profits. This article will help to identify some of these legitimate tax deductions and will show you how you can benefit from them.
The Home Office
Many people avoid taking a home office deduction, but if you carefully follow the guidelines provided by the IRS, this could be a big savings to you. This would include a portion of utilities, furniture, office equipment, and supplies, as well as your telephone expense. You may even able to deduct a portion of your real estate taxes. The office area of your home should be dedicated exclusively to your real estate investing and property management activities. This means just because you have a computer in the den that you keep property management records on you can\’t claim it as a home office if the den also has a television or other entertainment activates that a family would normally enjoy. If you follow the IRS guidelines and you should have no problem.
Travel Expenses May Be Deductible
If you have real estate properties spread out over an area of any size, you most likely will have to travel to check on them. This is true, even if your real estate investments are all within your immediate local area. A portion of your gas expense and travel allowance as established by the IRS is deductible. You will need to keep an accurate record and log your travel. This goes for everything that is associated with your properties, for example, a trip to the hardware store for a replacement faucet or lumberyard for a gate repair. If you have properties outside of your immediate area, a portion of travel expense as well as meals and accommodations may also be deductible.
Taking Care Of Business
In real estate investing, almost anything associated with the property can be deducted from the income produced. Property management expenses, interest on the loan secured by the property, and repairs that are made, although some major repairs or renovations may need to be spread out over a longer time period. One of the largest deductions is depreciation on the property. The government allows you to depreciate a portion of your cost each year as an offset to your income. This will of course reduce your initial cost for tax purposes and will affect the capital gains taxes when you go to transfer or sell the property. A good property management company can advise you in greater detail.
Insurance Coverage Is Important
You should always have adequate insurance coverage for all perils including fire, wind, and flood. If you have a mortgage on the property, the lender will require full coverage to protect their interest as well. Insurance is not cheap, but necessary. The premiums you pay are a direct expense associated with the property, thus count as a legal deduction just as your real estate taxes would count.
If you have several properties that require the employment of others, and you provide insurance coverage for them as well, this too can be a deductible expense.
Legal And Professional Fees
Real estate investing can be complicated and you\’re not expected to know everything or to be an expert in every field. There will be times that you may have to hire an attorney or an accountant. The fees these and other professionals charge are deductible from your taxes. The same applies to plumbers, electricians, painters, and other trade professionals.
A number of expenses are commonly associated with property management and real estate investing. Become familiar with the ones that you can put to work for you by reducing your taxable income and then document them accordingly. If you don\’t feel comfortable in deciding which expenses you\’re entitled to, consult with a good property manager, accountant, or tax attorney.