The Best Tax Deductions for Real Estate Professionals

Shrink payments and maintain SBA rules with viable write off tactics

You have ongoing’business expenses and your taxes can be quite complicated with a real estate business, whether you rent buildings, flip properties or (like many people use our office for) even run a property management company. Knowing the most significant real estate tax deductions can help owners reduce taxable income and keep more money in their pockets. This is a round-up of deductions for freelancers, covering the most common and influential deductions to help you differentiate between similar costs as well recordkeeping best practices that will ensure the government backs your claim.

Mortgage Interest and Property Taxes

For many property owners, one of the biggest deductions is mortgage interest. Interest on loans used to purchase or improve business property is usually deductible. Local property taxes are also typically deductible if they are for business properties. Hang onto clear records that demonstrate the assignment of interest and taxes to each property in your portfolio.

Operating Expenses and Repairs

Reasonable and necessary daily operating costs, when they are “directly related to the trade or business,”6 may be deducted. Those expenses include utilities, advertising, management fees, insurance premiums and professional services such as legal and accounting fees. Repairs that bring a property back to its previous condition — fixing a leaky roof or repairing a broken furnace, say — are generally deductible in the year they’re incurred. It’s important to keep a record of what work is being done, and to then keep invoices and before-and-after photos whenever you can.”

Improvements vs. Repairs: When to Capitalize and Depreciate

However, not every spending is an immediate write-off. Enhancements that add value to an asset, extend its useful life or allow it to be used in a different manner — like a new roof on a building, the construction of an addition or the installation of central air — are generally capitalized and recovered over time as the asset is depreciated. Separating repairs from improvements is a frequently problematic task and can require intricate documentation and cost apportionment when a project involves both repair and improvement components.

Depreciation: Cost Recovery for Property

Depreciation is a valuable tax deduction that enables owners to recoup the expense of income-generating property throughout its useful life. Recovery periods for residential rental property, nonresidential real property, and qualifying capital improvements are prescribed by the Code. This tax benefit lowers taxable income (without an actual cash outlay) and may also play a significant role in tax planning for long-time real estate investors. Maintain good records of what you paid to buy and improve the property, as well as when you placed it in service, so that you can depreciate accurately.

Home Office and Dedicated Workspaces

If you operate your real estate business from home, and use that space solely for business purposes, you may be eligible to take a home office deduction. This can include a proportion of mortgage interest, property tax, utilities, homeowners insurance and maintenance attributable to the business use of your home. Business use must be regular and exclusive The space used for business purposes has to be both regular and exclusive. And if you rent an outside office or co-working space, those costs are also deductible as ordinary business expenses.

Vehicle and Travel Expenses

You can claim deduction for vehicles used to do property maintenance work, visits with clients, or showing properties. You may deduct the actual auto-related costs (fuel, maintenance, insurance, depreciation) pro rata for business use, or an available standard mileage allowance for your vehicles. Travel for when it comes to out-of-town property inspections, investor meetings or training may also be deductible are primarily related to business. Keep a running log of your miles, locations, reasons and dates.

Advertising, Marketing, and Leasing Costs

Costs associated with finding tenants and marketing your properties, like online listings, signage, photography and marketing campaigns, are deductible as ordinary business expenses. Tenant screening fees, leasing agent commissions and bonuses paid for tenant referrals are also deductible. These are the “costs of doing business” that drive profitability and should be measured by property for proper reporting.

Professional Fees, Licensing, and Education

Professional services fees, such as accounting and legal advice, tax preparation and licensing are deductible when related to your real estate business. Ongoing education that keeps or improves skills you need for your business can also be deductible. Draw a clear line between the educational expenses that qualify (those associated with current business activities) and those that are personal, or qualify as capital improvements to your professional credentials.

Insurance, Utilities, and HOA Fees

Business expenses Business-related premiums, such as property, liability or landlord insurance, are deductible. In the case where the owner pays for rental property utilities – water, gas, and electricity – it is deemed those are business expenses. Also, rental any HOA fees on your rental property are deductible as operation expense. Record costs and be clear which are business related.

Supplies, Minor Equipment and Tenant Services

Consumable items, such as bulbs, cleaning supplies and office material, small tools used in the maintenance of property are generally deductible when consumed/ in year spent. Small equipment acquisitions can be expensed under a de minimis rule or if they fall below capitalization criteria. Costs for tenant services — including landscaping, pest control and snow removal — are merely a property’s ordinary and necessary operating expenses.

Retirement Contributions and Health Coverage

Self-employed real estate owners can lower their taxable income by contributing to retirement plans established for business owners. Contributions to qualified retirement plans are subject to plan rules and limits, but can provide big tax advantages. Self-employed health insurance premiums Some conditions must be met, but you can deduct the cost of self-employed health insurance on your tax return. It makes sense for a tax professional to decide which retirement and health strategies are best for your business.

Recordkeeping and Timing

Proper documentation to support the deduction is critical. Hold onto invoices, receipts, bank statements, contracts and mileage logs. Make organization easier with systematic files by property and category to help you keep accurate records for bookkeeping and year-end reports. And there is the timing of expenses to think about; speeding up or slowing down deductible costs so they are all paid within a tax year can make a difference on taxes.

Working with Advisors

Although many deductions are clear-cut, other involve subtle differences and long-term tax ramifications. Working with an experienced tax adviser or accountant who knows real estate tax laws, you can maximize deductions, minimize snags and strategize for acquisitions, dispositions and improvements.

Conclusion

The ability to understand and widely apply real estate tax deductions, such as those relating to mortgage interest or depreciation, repairs, car expenses and professional fees can make a significant impact on the financial results of investments in securities used in the business. Focus on strong documentation, know the difference between a repair and capital improvement, and be prepared to plan ahead to take advantage of deductions — but you’ll need to remain compliant. With careful record keeping and a deep understanding of what can and cannot be taken as real estate write offs, business owners are able to retain more of their income, which they can use to expand their company.