Real estate investing is one of my favorite investment vehicles due to leverage and many tax benefits. One of the many advantages of owning a rental home is the tax deductions – both those that are financially incurred and those that are just a loss on paper.
Here is a list of common deductions:
This one makes it to the top of the list as it’s a paper loss and typically represents a significant amount. To calculate your depreciation, follow these steps:
- The value of your real estate is made up of the land you own and the structure built on top of it. The depreciation only applies to the structure, so the first thing to do is to allocate the property’s purchase price between the value of the land and the value of the structure – an accountant can help you appropriately do this.
- The IRS has decided that the life of a residential structure is 27.5 years. Take the value of the structure and divide it by 27.5. This is the annual depreciation of your real estate investment property.
Most rental home investors purchased the home with a mortgage. The interest on the mortgage is fully tax deductible.
Property taxes are deductible. If you have an escrow account to pay for taxes, please see your statement for amounts to deduct.
Your homeowner’s insurance premium is deductible.
Fees assessed by your management company are fully deductible.
If you pay utilities for your residents, you’ll be able to deduct those amounts.
Auto & travel
Consult your accountant for the specifics as this could trigger an audit.
Maintenance, repairs or cleaning
If you performed work on your rental home, these costs are tax deductible.
Legal & professional fees
Any fees assessed by an attorney or other professional are deductible.
Lastly, if you purchased or refinanced a home this year, be sure to take a look at the closing costs you paid as most items are tax deductible. Better yet, give your settlement (or closing) statement to an accountant with real estate experience and they’ll be able to help guide you through this.