People seeking profitable investments that provide a steady stream of income often invest in real estate. Real estate is a great way to invest in a physical asset that usually gains in value over time, while also producing an income.
Real estate investments also provide landlords with attractive tax advantages that can help increase annual revenue, create jobs, and even allow you to travel the world if you have an international real estate portfolio.
Here are 10 of the top tax advantages real estate investors can utilize to boost profits. But as with all accounting issues, carefully consult your CPA on which expenses are deductible and the records you must keep.
#1 Travel Expenses
Landlords often travel to secure investment properties, signup new tenants, and manage their properties. As an expense of doing business, travel expenses are deductible. You may have lodging, airfare, meals, and other transportation expenses that can be counted as business expenses.
The miles you drive can add up quickly, especially if you manage your own investment properties. So, we want to mention mileage expense separate from travel.
Calculating these costs can be complex, so check with your accountant to determine which of these methods you may qualify for, and which may be best for you.
- You can deduct the actual expenses, such as gasoline, upkeep, and repairs.
- Or, you can take a deduction for mileage.
If you take a deduction for the miles you drive, you have to keep records of the miles driven, so again consult your accountant. The exact deduction usually changes from year-to-year, but it’s been hovering around $0.50 per mile the last few years. So, if you drive 20,000 miles with your business, you get a handsome deduction of about $10,000. So, recording and deducting your mileage can increase your profits.
Unlike other expenses, the entire purchase price of an investment property is not deductible the year of purchase. Rather, the cost is deprecated over several years.
To determine the specifics of what is depreciated and the annual tax deduction for depreciation, consult your accountant since the calculation and tracking can be difficult.
#4 Employees and Independent Contractors
Real estate investors often use employees and/or contractors to maintain and manage their investment properties. Wages and payments to contractors are deductible business expenses.
#5 Repairs & Maintenance
The costs of maintaining and repairing investment property can be substantial for investors with a large number of properties, so managing and tracking these costs is vitally important.
These costs are typically deductible, if the maintenance and repairs are necessary and reasonable. Costs for repairs are usually deductible the year of the repair, but check with your accountant, because this deduction can be tricky, especially if value is being added to the property.
Interest can be the biggest expense real estate investors deduct from their taxes. Interest in the form of mortgage interest payments, hard money interest, credit card interest, and interest invoiced from suppliers for goods and services can be deducted as a business expense.
#7 Casualty Losses
Theft or major damages from sudden events such as fires are often deductible on your taxes. When these events occur, they are called casualty losses. However, you may not be able to deduct the entire cost of the damage. Overall, the amount you can deduct depends on the amount of property destroyed, and the type of insurance that covers the property.
When substantial casualty losses occur, immediately consult your accountant and possibly your attorney.
#8 Home Office Expenses
Real estate investors often have a home office, whether or not they also have a business office. You can deduct home office expenses, but this deduction is one of the most complex. So make sure you consult your accountant before setting up your home office.
#9 Professional Services
Landlords frequently use professional services by attorneys, accountants, property managers, and real estate investment advisers. Fees charged by these professionals are a business expense and deductible.
#10 Insurance Costs
Insurance premiums are deductible. The types of insurance you might carry as a landlord could include fire, theft, and flood insurance for rental property, landlord liability insurance, and health insurance for employees.
Increase Profits by Consulting Tax Professionals
Business and personal taxes are complex and often times vary from state to state, so it’s important to regularly consult your tax professionals.
Whether you are just starting to invest in real estate, or you are growing your business and becoming more complex with your organization, tax professionals can help you increase profits by taking advantage of tax deductions.