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Another Tax Season Descends: Why Real Estate Investment Property Owners Are Smiling

Is April 15th coming upon us already? It’s hard to believe another tax season has arrived. Let’s be honest - the process of assembling documents, completing forms, and filing our returns each year must be one of life’s least pleasurable activities.

However, for many of our clients who own real estate investment properties, the annual sting of potential tax obligations is often a bit less worrisome than for those who don’t. There are several reasons why and it's worth highlighting a few here. In this post, we’ll focus on one of the biggest reasons: deductions.

Deductions

As with any tax benefit, certain restrictions apply, and we recommend potential investors and property owners always consult with a tax professional for proper counsel; that would include obtaining additional insights on many of the deductions we identify here. In general, however, the deductions afforded rental property owners can be quite compelling. According to a recent article from Nolo.com, here are ten of the most popular deductions available to landlords:

1. Interest

This includes not only mortgage interest payments on loans used to either buy or improve a property but even interest on credit cards used for purchases of services or products related to maintaining a property.

2. Depreciation

Even though most rental properties appreciate over time, rental property owners are allowed to depreciate the non-land portion of their properties either over 27.5 years if residential or 39-years if non-residential. This write off can substantially reduce the tax liability on rental income received by landlords. Furthermore, it may be possible to accelerate the amount of allowed depreciation through utilizing bonus appreciation allowances permitted under the recent Tax Cuts and Jobs Act of 2017 (TCJA).

3. Repairs

Need to replace some light fixtures? Is it time to repaint? Required to fix a roof? All these expenses can be deducted in the year they were incurred. The recent Tax Cuts and Jobs Act broadens the list of eligible items that can be expensed in the first year of use.

4. Personal Property

Owners often miss this one, thinking that personal property purchased for use in a rental property needs to be capitalized. But the IRS permits deductions for certain purchases under the de minimis safe harbor deduction (i.e., property valued at less than $2,000). These expenses often include appliances and furniture in rental units and landscaping equipment related to property maintenance.

5. Pass-Through Tax Deduction

The 2017 Tax Cuts and Jobs Act enabled landlords to qualify for a special (income) pass-through tax deduction. Depending on a landlord’s income, he might be able to deduct up to 20% of his net rental income thereby reducing the amount of taxes that would otherwise be owed. This deduction is scheduled to expire after 2025.

6. Travel

Most of the travel costs borne by landlords associated with their rental properties can be deducted. If you drive a vehicle you can use the standard mileage rate permitted by the IRS ($.58/mile in 2019) or deduct actual expenses for gasoline, car maintenance, etc. Even overnight travel costs, airfare, meals and lodging associated with remote rental properties may be deductible.

7. Home Office

Home office expenses are often tricky as they relate to permissible deductions and there are certain requirements that need to be met. That said, however, landlords may be able to deduct home office expenses related to space delegated for use of managing the rental property.

8. Employees and Independent Contractors

Wages paid to workers providing services for a rental activity can be deducted as a rental business expense. It doesn’t matter whether the worker is a company employee or an independent contractor.

9. Insurance

Premiums paid for most types of insurance for a rental property can be deducted. These include premiums for policies that cover liability for the owner as well as property insurance for fire, theft and flood. Even costs for employees’ health and workers' compensation insurance are deductible.

10. Legal and Professional Services

Finally, any fees paid to attorneys, accountants, real estate investment advisors and property management companies can be deducted as operating expenses if the fees are paid for work related to a rental activity.

To minimize the odds of tax authorities denying or reducing claimed deductions, landlords must get in the habit of keeping scrupulous documentation and records of expenses, travel dates, and even the amount of hours that they or others worked on their behalf to manage their properties.

Due to recent changes in permitted deductions, we strongly encourage landlords to seek out the assistance of qualified tax professionals when completing their tax returns. The added costs of hiring a competent tax advisor to review possible deductions and sign off on your tax return may be easily offset by greater peace of mind and more after tax money in your pocket.

Hopefully, this helps provide an understanding of the potential tax benefits of investment property ownership. In a future post, we’ll discuss some of the benefits afforded investors who have used a 1031 Exchange or Delaware Statutory Trust to purchase and own investment property. These structures are well-known for their ability to allow investment property owners to sell and reinvest while deferring any capital gains tax on their current property’s appreciation.

Please contact us today or email us at info@firstguardiangroup.com if you have any questions. You can also schedule some time on my calendar for a one on one conversation.

Paul Getty

Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $2 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student and senior housing. Paul Getty’s transaction experience includes buy and sell side representation, sourcing, and structuring of debt and equity, work-outs, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions. Paul Getty also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals.

Prior to founding First Guardian Group/FGG1031, Paul Getty was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 25 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion-dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M.

Paul Getty holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. He is a member of the Institute of Real Estate Management (IREM), a Certified Property Manager Candidate (CPM), and a member of the US Green Building Council. Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered representative with LightPath Capital Inc, member FINRA /SIPC.

Paul Getty is a noted speaker, author, and actively lectures on investments and sales and management related topics. He is the author of The 12 Magic Slides, Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors, and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.

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