What Real Estate Expenses Are Deductible?
Exploring various deductions and tax implications related to owning, renting, or selling real estate properties
Once you understand the process of buying a home and what’s affordable for you, consider the various tax deductions and implications that come with owning real estate.
As a result of Congress nearly doubling the standard deduction in 2017, about 90% of taxpayers now claim the standard deduction come tax time.
But if you own property, there is a good chance that you start to itemize deductions on your tax return.
Why?
Because the Government offers a number of tax deductions and credits that can help ease the burden of owning a home.
Unfortunately they don’t let you deduct all the headaches endured along the way…
Mortgage Interest
Interest paid on a mortgage for your primary residence or a second home is typically deductible, but you must be itemizing in order to take advantage of this. Especially if your interest rate is around 7%, deducting the interest you are paying could help reduce your taxes substantially.
Mortgage Points
Given that interest rates have increased significantly over the past 24-months, many homebuyers are paying extra to lower their interest rate. This is known as “mortgage points”. If you paid points to obtain your mortgage, you may be able to deduct them over the life of the loan or in the year you paid them, depending on certain criteria.
The IRS surprisingly built a some-what helpful flow chart to see if you are eligible to deduct the points you paid on your loan: https://www.irs.gov/media/168306
Property Taxes (State and Local)
The annual property taxes you pay to your local and state governments is typically deductible.
Even if you rent an apartment, if you are liable to pay property taxes as part of your lease agreement, you may be able to deduct that amount.
The IRS does limit that amount of state and local tax (SALT) deduction you can take. The cap is $10,000 for joint filers, or $5,000 if married filing separately. So, if your annual property taxes were more than $10,000 – say, $15,000 – you would only be able to deduct that first $10,000 on you tax return.
One caveat to be mindful of, too, is that if you use an escrow account to pay your annual real estate taxes, you can only deduct the actual amount that was paid out to cover those taxes in a given year.
Home Office Deduction
Do you work from home? Well, if you use part of your home regularly and exclusively for business purposes, you may be eligible for a home office deduction. This deduction allows you to deduct a portion of expenses like utilities, insurance, and repairs based on the percentage of your home used for business.
Energy Tax Credits
You may be able to catch a tax break if you make home improvements that boost the energy efficiency of your home.
This can be new energy-efficient windows, doors, water heaters, furnaces, etc.
Check out this article to learn more.
Rental Properties
Do you own, or would you like to own a rental property?
Here are some of the deductions/write-offs that can be associated with that:
Depreciation: If you own rental property, you can deduct a portion of the cost of the property each year through depreciation. For a residential rental property, you typically depreciate the value of the home over 27.5 years. This can lead to tax free rental income for many years, as the rental property depreciation and annual expenses almost always cancels out any rental income so you are able to collect from tenants.
Repairs and Maintenance: Expenses for repairs and maintenance on rental properties are deductible.
Insurance Premiums: You can deduct the cost of insuring your rental property, including fire, theft, flood, and liability insurance.
Travel Expenses: If you travel to manage your rental properties, you can deduct expenses such as airfare, lodging, and meals.
Utilities: You can deduct utilities paid for rental properties that you own, such as electricity, water, sewer, and garbage collection. You have to be the one paying these bills, not your tenants…
Professional Services: Fees paid to professionals such as lawyers, accountants, and property managers are deductible.
Other Real Estate Points to Consider
Real estate is a powerful asset as you can put down less than 20% as a down payment, the property tends to appreciate overtime, and you can get tax breaks along the way.
Once you buy a property, see if the city/town/area offers what’s called a “residential exemption”. For many Boston neighborhoods, if you live in your primary residence, they will drastically reduce your property taxes.
If your property gets assessed higher than what you paid for it, get in touch with your local town/city to see if you can file an abatement and maybe get a refund.
When you sell your primary residence, as long as you lived there for two of the five years immediately before the sale, you can exclude a majority of your capital gain. For a single tax filer, you can exclude up to $250,000 as a capital gain exclusion and a couple gets a $500,000 cap gains exclusion.
Keep good records: make you and your accountants life easier. Good record keeping can help alleviate a lot of stress save you money in the long-run. Like home-renovations, which may increase your cost basis and limit your tax exposure when you sell the property.
Real estate deductions can be very complex but these are some of the basics. I’m not Grant Cardone telling you to write everything off (which is complete bullshit 99% of the time). But these are important to keep in mind when you own property.
Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual. Seek the assistance of a tax professional with more detailed questions.