Real estate investment tax deductions
One of the favorite words in an investor’s vocabulary is deductions. We love deductions. There are all kinds of deductions at your disposal.
You can deduct interest on your mortgages, property tax deductions your insurance, and various holding costs. Some of these deductions only apply the year you buy them, they are not recurring. When taking about fees or points for the mortgage you have, rules are that you can deduct them, but not all at once, this must be done over the life of the loan. Your accountant can help you with this situation.
If you are a buy to let investor (renting property), you can deduct expenses incurred when fixing something on the property, or doing things to maintain the investment property. It really can be several things. Any cleaning expenses or repairs can be deducted. I would double check with my accountant on occasion just to make sure that no tax laws have been changed or introduced that may change what I can deduct.
If I remember correctly, if you do something on your property that increases its value, it is a capital expenditure and you cannot deduct it all at once. This is treated kind of like points on your mortgage. The cost will be depreciated over the amount of time the improvement is of use on your property. These captial expenses are things like plumbing, electrical work, repairing flooring, siding…things like that.
Depreciation in real estate investing
Real estate investors can deduct the losses incurred on the improvements made to the investment property. Over time you will have to replace things like carpeting and siding. You have a schedule to follow to claim the depreciation properly. This is done the whole time you own the property. This even stays with you if you invest in a new property and use the 1031 exchange. Depreciation can be complicated, so I would again lean on my accountant to help with these figures.
How much depreciation can you deduct?
How much depends on how involved in real estate investing you are. If you have partners you can deduct depreciation to basically keep your profits from the investment property.
If you bought your investment property by yourself your deductions are a bit different. You don’t really have any restrictions on losses you can claim, since the property is your responsibility.
If you bought your property but you still maintain another full time job, you have limits on how much depreciation you can deduct. It is a specified amount. If I remember correctly it is maxed out at around 25k.
Other deduction caps
There are other limits on real estate investment deductions that should be mentioned. Some have to do with investors who still maintain another full time job. It deals with using your real estate investment losses against your salary. There is a cap. There are many books that discuss this deduction in detail. I do believe that the cap is set at $100k. For every 2 bucks over $100k you lose $1. So if you make $150 you have no deductions vs. your income. As mentioned earlier you don’t lose these, they are just saved up.
Capital gains taxes
Capital gains taxes are paid when you profit on a sale of an investment property. You won’t have to pay these taxes however, if you lived in the property for 2 years or more, and the sale didn’t exceed $250,000.
