Investing in real estate can be a profitable decision. However, as withany investment, you’ll owe taxes on the revenue you generate from your real estate assets. Real estate tax deductions are expenses that reduce your taxable income, meaning you owe less in taxes. Planning ahead is the best way to optimize your tax deductions.
What Are Real Estate Tax Deductions?
Real estate tax deductions are costs that reduce your taxable income, often resulting in a lower tax bill. A qualified real estate tax deduction is any expense you incur related to real estate ownership. This might include the fees associated with buying and selling real estate assets, such as interest. It might also include any costs of owning a real estate investment, such as property management fees, repairs, depreciation, or a home office.
Key Takeaways
- Optimizing your real estate tax deductions offers many benefits, including owing less, qualifying for a larger refund, offsetting other investment losses, and maintaining your property values.
- Real estate assets qualify for many deductions, including property taxes, home improvements, property management fees, and business travel.
- Keep accurate records of all expenses throughout the year to make filing easy and to protect yourself in the event of a tax audit.
- The IRS allows investors to take a depreciation deduction with each year of ownership.
- Lease-to-own programs can reduce your taxable income and split your tax liabilities over multiple years.
Benefits of Optimizing Real Estate Tax Deductions
The many benefits to optimizing your real estate tax deductions include:
- Reducing the amount you owe:Optimizing your real estate tax deductions reduces your taxable income, which can alsoreduce how much you owe in taxes.
- Increasing your refund:Some filers might qualify for a refund, and optimizing your deductions can maximize the amount you receive.
- Offsetting losses:Some investments might not work out, but deductions can help you offset those losses, especially if they reduce your taxable income on more profitable assets.
- Maintaining property values:Repairs and maintenance are eligible deductions that allow you to maintain your property value while qualifying for a lower taxable income.
The more you save in taxes, the more you can apply to other investments. Diversifying your investment portfolio in real estate or other assets can help you increase your wealth.
Common Real Estate Tax Deductions
Real estate assets qualify for many deductions. Some of the most common include:
Property Taxes
Most properties in the United States are subject to property taxes, which are fees a property owner pays to cover local services. Both state and local property taxes are deductible, usually up to $10,000. However, you must have already paid the taxes to qualify for property tax deductions.
Mortgage Interest
Mortgage interest is a feelenders charge for borrowing money to buy a house. While mortgage interest rates vary between states, lenders, and your credit score, the average is somewhere around 6%. Interest can increase a mortgage payment by a few hundred dollars per month, which is deductible up to $750,000.
Home Improvement Expenses
Real estate assets require ongoing maintenance and repairs. While the IRS doesn’t allow home improvement deductions on personal residences, you can claim them on investment properties. Any money you put into your assets, including painting, carpet cleaning, plumbing, or electrical work, can be deducted from your taxes.
Property Management Fees
Some real estate investors might incur property management fees. These are feesreal estate or property management firms charge to screen tenants, collect rent, manage legal disputes, and handle any routine issues with the property. Property management fees are usually a percentage of the rent each month and might be as high as 10%, leading to significant tax deductions.
Ordinary and necessary legal fees are also qualified exemptions. These might include the cost of legal representation for tax issues, filing fees, or real estate disputes.
Home Office
If your real estate investments require the use of a home office, you might be able to include it in your deductions. A space must meet specific requirements to classify as a home office, but doing so can bring down your taxable income. Other eligible deductions include home office services, such ascleaning or pest control. You can also claim office supplies, including computers, phones, paper, or folders.
Business Travel and Mileage
Some real estate investors incur travel and mileage fees. You can claim travel expenses, such as airfare, hotels, and car rentals, as long as the costs are related to your assets. You can also claim the standard mileage for miles driven to and from your assets. The standard mileage deduction varies yearly but is usually around 50 to 60 cents per mile.
