Investment property tax deductions

Each year, millions of investment-property owners file tax returns claiming more net rental income than they should. Why? Because they do not take advantage of all of the tax deductions available. With good record-keeping and careful planning, anyone can take advantage of these deductions. Rental real estate held for investment affords more tax benefits than nearly any other investment.

Many of us with investment property keep good records of the easy stuff: hard expenses we spend actual money on, such as advertising, insurance, legal, repairs and supplies. However, many other expenses are available and deductible against rental income that we either do not track as well or simply do not think of mentioning to our accountants at tax time. These expenses can often result in a rental loss for tax purposes. Here are a few.

Home office. If certain requirements are met, home office expenses attributable to the square footage within your home designated as your office may be deducted from rental income. These include utilities, mortgage interest (or rent paid), homeowners insurance, and repairs and maintenance paid either to the entire home or directly to the office itself.

Interest. This is often our largest expense, especially in the first several years of owning the investment as much of the monthly mortgage payment is amortized to interest and not principal pay-down of the mortgage. However, this deduction might also include interest paid to a home equity line of credit on the property or even credit card interest for items paid toward the investment home.

Casualty, disaster and theft losses. If the investment property is damaged or destroyed due to a natural disaster or theft, you might be able to deduct part, if not all, of your loss related to the investment. Typically your loss is limited to your adjusted basis in the property and will likely also be limited by any insurance reimbursement.

Depreciation. If planned correctly, this “non-cash” expense can often mean the difference in paying tax on rental income or realizing the benefit of a tax loss. While most of the investment will be depreciated straight-line over 27.5 years (39 years for commercial real estate), you can increase depreciation expense in the first several years by using cost-segregation and identifying assets within the home such as appliances, cabinets and fences that can be depreciated over shorter taxable lives (five, seven and 15 years respectively in this case). Also, Section 179 depreciation and bonus depreciation may be available and advantageous.

In the end, nothing is more important than proper planning for tax purposes when adding investment real estate to your portfolio. Do your homework, spend time talking with a tax professional and remember to keep good accounting records along the way. By taking advantage of all of the tax benefits available to investment real estate, you can build true wealth over time with an appreciating asset as well as earn income along the way. Happy investing!