You’re a smart real estate investor. You want to maximize the ROI on your investments as much as possible.
It’s not always easy as markets fluctuate and there are many variables at play. One of the things you can control is the amount of taxes you pay. That doesn’t mean that you break the law and go to jail for tax evasion.
What you do is look at the real estate investment tax deductions available to you. These deductions are legal, and they help you minimize your tax burden.
Do you want to know more? Keep reading to find out about the top tax deductions available to real estate investors.
Table of Contents
1. Interest
There’s a good chance that you had to finance your commercial property purchase. If you did leverage the bank’s money for your investment, you’re paying back principal and interest on that loan.
The good news is that you can deduct the amount of interest you pay on your tax returns. This is often the biggest write off you’ll get on your taxes.
2. Foreign Real Estate Tax Deductions
It’s a dream of many people to own a villa, country home, or investment property in Europe. If you do go this route, you need to be aware of the tax implications.
A lot of the tax issues will depend on how you use the property. If it’s a rental property and you receive income, you want to avoid being taxed twice. You can take advantage of the tax code where the property is located and get a tax credit on your American returns for taxes paid to other countries.
Do you have investment properties in the UK? What do you think of when you hear fixtures and fittings? You’re likely to think of plumbing fixtures, lights, and carpets.
In the UK, there are special tax advantages that apply to fixtures and fittings. Find out more about that tax deduction.
3. Pass-Through Business
In the 2017 Tax Cuts and Jobs Act, a tax deduction was introduced to allow most business owners (including rental property owners and investors) to deduct a percentage of their income.
With the pass-through business deduction, you take your income from the past year and deduct up to 20% as a line item on your tax return.
This deduction is temporary for the next several years and will expire in 2025. Congress could decide to extend it, but with today’s political environment, who knows what will happen.
4. Depreciation
When you buy a real estate property for investment purposes, you don’t write-off the entire purchase of the property. That would be a huge refund!
What you do is deduct a portion of the cost of the property from your taxes spread out over time. For commercial buildings, you spread the cost of the property over 39 years. You can spread the cost of a rental property over 27.5 years.
5. Defer Capital Gains Taxes
Real estate investors like to buy low and sell high. That’s how you turn a nice profit on a property. However, when you do turn a profit, you need to pay capital gains taxes.
You can defer payment of those taxes by using a 1031 exchange. With a 1031, you can invest in another property that is considered to be worth the same or more.
This is a complicated transaction that has a lot of deadlines attached. If you’re planning on upgrading your investments or business building, you can sell your property and essentially roll your profits over into a larger property.
The thing is that you can’t sell your property and then wait 3 years to find a replacement. You have 45 days from the sale date of your property to find a replacement. After you have a replacement, you have 180 days or until Tax Day to finalize the purchase, whichever comes first.
6. Home Office
Do you run your investment business out of a home office? You may be able to qualify for a home office deduction. The IRS has strict rules about this tax deduction.
The main factor is that you have an office or space that is used for the specific purpose of conducting business. Having a desk near the living room won’t qualify. Turning a spare bedroom into an office would qualify.
If you run your business out of a separate office that you rent, you can deduct those costs from your taxes as well.
7. Rental Property Repairs and Equipment
Pay attention to this if you have rental properties as part of your portfolio. You’re treating your rental property as a business, you should take those real estate investment tax deductions for your business expenses.
Do you need to clean a property after a tenant vacates the unit? That’s a business expense. So is the plumbing repair that has to be done on the rental property.
If you have to purchase a lawnmower for yard maintenance, that’s an expense. Same with hiring contractors or employees for your business.
The same goes for internal fixtures and fittings from commercial stair treads to replace or update any existing carpet in communal areas, office buildings or other types of property you own to new doors, handles or windows. If this is part of your responsibilities keep a track of your spending.
Save the receipts and keep excellent records of these expenses. Your tax professional will need them when it’s time to do taxes.
Take Advantage of Real Estate Investment Tax Deductions
As a real estate investor, you need to treat your investments like running a business. You want to make sure that you maximize your profits as much as possible.
Knowing what the top real estate investment tax deductions are will help you do that. There are countless deductions that qualify as business expenses. They range from foreign deductions to regular business expenses.
You want to make sure you have a great tax advisor by your side. They’ll help you get the most out of your qualified tax deductions. There are a number of companies the specialize CPA tax preparation services to help you navigate the tax maze and ensure that you’re leveraging your real estate to its fullest extent.
Do you want to know more about real estate investing? Check out the Invest Your Money section of our blog for more great content.