Top 10 Real Estate Tax Write-Offs
As real estate values have fallen and foreclosures have swamped the market, increasing numbers of would-be sellers are deciding to lease their properties instead of selling. These new and reluctant landlords often miss out on massive tax deductions available for investment properties, which can save thousands of dollars in taxes. In an economy where every penny counts, make sure you take advantage of these ten real estate tax write-offs, some of which are exclusive to real estate investors and landlords.
1. Mortgage Interest
Even homeowners can write off mortgage interest, so this deduction is widely known and understood, but mortgage interest can add up to many thousands of dollars each year; not a deduction to miss.
2. Hazard Insurance
If you were a reluctant landlord, you can rejoice over this one: homeowners can't write off their homeowner's insurance, but landlords and real estate investors can write off their hazard insurance premium as a deductible expense. Be sure to save a copy of your insurance premium invoice, and give it to your accountant.
3. Property Taxes
As intuitive as it sounds, thousands of property owners forget to list their real estate property taxes as deductible expenses every year, and end up effectively paying those taxes twice.
4. Property Depreciation
Real estate depreciation is not well understood, but it adds up to a substantial sum each year. Basically, the government allows real estate investors to take a "paper loss" of value on a mathematical model that assumes that properties will steadily decline in value over 27.5 years, from their purchase price to a value of $0. This means you can deduct a depreciation loss of 2/55 of the purchase price, for the first 27 years you own a property. Depreciation can become complicated however, so make sure you discuss this one with your accountant.
5. Legal Counsel & Landlord Forms
Most of the legal bills, including the cost of landlord forms and real estate legal contracts, are tax deductible for your investment property. Important exception: eviction costs, which generally cannot be deducted, but speak with your accountant for further details on exactly which expenses can and cannot be deducted.
6. Property Management Costs
If you've hired a property management company to oversee your tenants, leases, and properties, their costs are tax-deductible, so be sure to add up their fees and write them off (and remember that you'll owe the property manager a 1099 if the total fees were over $600).
7. Private Mortgage Insurance (PMI)
If you have a high mortgage relative to your property's value (and right now, who doesn't), chances are you pay an extra charge each month for private mortgage insurance along with your mortgage payment. These charges, while annoying, can at least be deducted from your taxable income.
8. Maintenance & Repairs
While homeowners can't write off their home improvements, landlords and real estate investors can! There are some exceptions (so touch base with your accountant), but in general any repairs that are required for habitability and safety are tax-deductible.
9. Advertising & Tenant Screening
When landlords have vacant properties, they can write off the costs associated with filling them, such as advertising the rental property, pulling credit reports, obtaining criminal background checks, etc.
10. Settlement Costs
If you're one of the rare and lucky people actually buying investment properties right now, some of the settlement costs you pay can be deducted, such as mortgage lender fees and government recordation costs. Not every settlement charge is tax-deductible, however, so be sure to send a copy of your HUD-1 settlement statement to your accountant so they can comb through it and find all of the deductible costs.
As a final note, remember that your accountant's bill is deductible as well, on next year's tax return, so be sure to include last year's accounting bill among this year's tax deductions, and good luck saving money on taxes!
This is a guest post by Brian Davis. Brian is a landlord and real estate investor, who contributes educational content for real estate investors to dozens of websites, and consults for EZ Landlord Forms. Read more articles at EZ Landlord Forms: