Top 5 Tax Deductions for Real Estate Investors

Finding ways to reduce the amount of taxes you owe each year is always worthwhile, no matter who you are and what your job entails. When it comes to real estate investing, there are several deductions you can receive to help keep your owed balance low. With these top five tax deductions for real estate investors, you’ll have a better chance of limiting the final amount that you have to pay—if you have to pay at all. It’s yet another reason why investment properties are worthwhile. 

Expenses Related to Business Matters Regarding the Property

Because an investor is operating as a business entity, any property-related business matters can be deducted from your taxes. These matters might include maintenance and upkeep costs, property tax payments, property insurance, mortgage interest, management fees, and anything else pertaining to the home that could work against the business should it go unhandled. If you have a phone number set up strictly for your properties or you’ve purchased a computer for your business, these expenses can be deducted.

Keep in mind deduction expenses are not included in the complete renovation costs. The only thing considered is the typical maintenance you need to keep the home in good condition. However, there are other deductions you can make, so always be sure to detail what you’ve done with the property and how you’ve handled expenses to your tax preparer. They will help you deduct the most things possible for your benefit. 

Depreciating Values Pertaining to Property and Related Purchases

Working with a tax professional experienced in real estate investing is key to ensuring you get all of the deductions you’re owed as a real estate investor. For example, they’ll understand how to file properties and related purchases over a period of time to account for depreciation. Rather than adding your computer to the first set of expenses, you could put it in the depreciation column instead and get a deduction over a period of several years. Commercial real estate, particularly if it’s being rented out, can be listed for depreciation for up to 39 years. Residential real estate could help you over the next 27.5 years. 

Short and Long-Term Capital Gains

Short and long-term capital gains are calculated a bit differently. Short-term gains are those you receive from flipping a property. Say you plan to purchase a property, rehab the home, and then sell it to someone else within one year’s time. The income you earn from the process requires you to pay taxes on short-term capital gains.

If you hold onto that property for more than a year, you get a better tax rate for long-term capital gains. However, this may not be able to be applied if the income you earn is not enough to qualify. 

Various Incentives

There are also various tax incentives related to investment properties. The IRS Tax Code under Section 1031 details what is known as the 1031 Exchange. Sell your property and immediately buy another, and this exchange can help you defer your taxes on capital gains. It essentially postpones your payment, so you don’t have to worry about that cost anytime soon. 

Another incentive comes when you invest in low-income communities. You can’t just purchase a property within a distressed area, though. You need to make your sale and immediately invest the income in a Qualified Opportunity Fund. This helps out a community within the Qualified Opportunity Zone and allows you to defer your capital gains. 

This situation came about in 2017 when the Tax Cuts and Jobs Act was initiated. To get approved for this, you have to file within 180 days of the sale. You’ll be filing an “Initial and Annual Statement of Qualified Opportunity Fund Investments” each year on your taxes to continue receiving the deferment.  

The Tax Cuts and Jobs Act also assists with Qualified Business Income. You can receive anywhere up to 20% of a deduction on the rental income you earn. This is considered a pass-through tax on passive income. For this situation to work well for you, you need to carefully consider your Return on Investment, or ROI, for a property before you purchase and begin renting out the units. 

Calculating the purchase price, upkeep costs, the rental amount you receive, and so on will help tell you if the building or home is worth buying and renting out. Some won’t be as worthwhile as you might initially believe. 

Self-Employment Tax

If you are operating as a self-employed real estate investor, you will have to pay a self-employment tax. You are not receiving W2s from a typical job or any money deducted from your checks. Therefore, you’ll need to pay tax on your income when you file. Some people handle this quarterly, while others wait and do it annually, paying a much larger amount at once. However, you’ll be saved on this tax if you are simply a landlord of the building earning rental income. 

With the ever-changing tax rules, restrictions, and possible deductions, it’s wise to work with a professional who understands tax deductions for real estate investors. Someone who is well-versed in real estate investment and related tax purposes is best to see in your situation. Otherwise, you may not be receiving all of the deductions you are eligible for and paying more than necessary come tax time. 

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