By Maryann Kingman, Tax Attorney, Kingman Winslow LLC
Real estate investors face complex tax issues that strain resources and drain profits. Kingman Winslow, LLC’s tax professionals offer 10 tips that help investors manage their tax burden.
1. Car Travel
Money spent on travel to collect rent or maintain a rental property is deductible.
The deduction is typically for actual expenses or the standard mileage rate. You must choose one method and stay with it each year unless you change vehicle. Actual expenses include depreciation, insurance, registration fees, parking, gas, and maintenance. It is very important to keep a track of costs and receipts when deducting actual vehicle expenses. If the vehicle is not used solely for rental activity, then one should keep a record of mileage traveled so a percentage of the vehicle’s actual expenses can be deducted.
50% of meal expenses incurred away from home to collect rent or maintain a rental property are deductible. It also includes travel costs incurred for hotels and airfares if overnight travel is required.
3. Tax Advice
Tax advice and the preparation of tax return schedules related to rental properties are deductible. Some legal fees associated with property including fees incurred to defend or protect title to property, recover property, or to develop or improve property are typically capitalized and amortized.
A landlord can deduct interest allocable to their rental properties such as mortgage interest. Expenses to obtain a mortgage are not deductible when paid. These include commissions and appraisals. They are amortized over the life of the mortgage. Other interest from credit cards related to a rental activity is deductible if the card is used solely for rental business purposes
A landlord can deduct the cost of repairs to maintain their rental property in good working condition. Repairs generally “fix” the property back to normal; therefore they are deductible as an expense. If it is not a repair, it is a capital item subject to depreciation.
Improvements that extend the value or life of a property are capitalized and depreciated. Depreciation is the annual deduction taken to recover the cost of the rental property having a useful life beyond 1-year. A residential building is typically depreciated over 27.5-years. A commercial building is typically depreciated over 39-years. Land is not depreciable. Components of a property are depreciated separately using a strategy known as cost segregation. Furniture and appliances, for instance, are depreciated over five years. Commercial landlords can take advantage of special deductions and credits for environmentally friendly buildings.
Cleaning and maintenance expenses that keep rental properties in good working condition are deductible. Common expenses are lawn maintenance, carpet cleaning, and other janitorial services.
8. Unexpected Losses
A landlord can typically deduct casualty or theft losses relating to their property that arises from a fire, flood, or vandalism. A casualty loss does not include normal wear and tear or progressive deterioration. The loss is not deductible if fully covered by insurance.
9. Home office
A landlord can deduct a home office or workshop used to manage their rental property. The space must be used exclusively for the business. If can be in a house or an apartment that is rented and used as a primary residence. Certain expenses like utilities and homeowner’s insurance are deductible based on a percentage of square feet dedicated for business purposes.
10. Dues and Subscriptions
Homeowner Association dues, magazine subscriptions, investor group fees and any other dues that are necessary for managing rental activities can be written off in the year they are paid. Amounts paid or incurred for membership in clubs organized for recreation such as country or athletic clubs are not deductible.
Learn more about tax planing and preparation from Kingman Winslow, ARPOLA’s exclusive partner, here.
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