Ask any real estate investor why they’re attracted to this asset class, and nine times out of ten they’ll mention the tax advantages. Moreover, even with the recent changes, the federal tax code is incredibly generous to property owners.
Property owners often overlook many of the tax deductions available to them. Most are so laser-focused on the mortgage interest deduction and depreciation that they miss other write-offs in the process. This year, make it a priority to maximize your investment’s full potential by taking as many deductions as possible.
Here are five tax write-offs that landlords should be aware of this tax season:
“That’s so obvious!” you might be thinking. However, wait—hear us out. We aren’t just talking about mortgage interest. Yes, whenever you own commercial real estate, multifamily or otherwise, you can deduct mortgage interest. That’s one of the single most substantial benefits to owning commercial property.
However, did you realize that you can also write off the interest paid on company credit cards, lines of credit, and other loans used to acquire, improve or for other activities related to your rental property? For example, if you put $5,000 on your credit card to purchase new appliances for one of your rental units, the interest you pay on that credit card can be deducted on your taxes. Just be sure to keep a separate business credit card; it’s the easiest way to track expenses and prevent the comingling of funds.
2. Accelerated depreciation
Once again, most real estate investors understand that depreciation is one of the most significant advantages of owning rental property. Typically, real estate investors depreciate their assets over either 27.5 years (residential) or 39 years (commercial), depending on the type of property. Those terms are what the IRS considers the “useful life” of the property.
Most landlords don’t realize that they can depreciate their assets faster by doing a cost segregation study. A cost segregation study, typically performed by a CPA, assigns values to the various components of a property. Personal property, for instance, such as furniture, carpets, fixtures, window treatments, and appliances, can usually be depreciated over a 5- to 7-year period. Land improvements, such as sidewalks, paving, fencing, and landscaping, can generally be amortized over 15 years. The rest of the building is depreciated over the standard time horizon (either 27.5 or 39 years).
The primary benefit of doing a cost segregation study is that it allows real estate investors to accelerate depreciation. This puts money back into an investor’s pocket faster, which is particularly beneficial in the first years of ownership if you’ve already put out a large chunk of cash to acquire or renovate a new asset. However, cost segregation studies are complicated and can be expensive (+/- $10,000) so landlords must consider that as well. The value of the property will typically dictate whether it makes sense for a landlord to move forward with a cost segregation study or not.
3. ADA upgrades.
Unlike most building improvements, which are amortized over either a 27.5 or 39-year time horizon, accessibility upgrades are treated differently. The IRS allows landlords to write off up to $15,000 per year related to expenses incurred while making a property more handicapped accessible. If you’ve installed a wheelchair ramp, widened doorways, installed lower countertops or made other improvements to accommodate a resident with disabilities, you’ll want to write off those costs this year. Any amount more than $15,000 is then added to the tax basis of the property and depreciated from there.
Did you invest in a new website last year? Did you send out mailers in search of investment opportunities? Did you create new signs to post at your property highlighting units available? These costs are all tax-deductible.
Landlords can write off expenses related to BOTH the advertising of their own business and/or the marketing of a specific unit or property. For instance, a landlord who paid a fee for speaking on a local real estate development panel could write off that fee. A landlord who hosted an open house at one of their rental units could also write off those costs.
Related: if you’ve offered an incentive to current residents who help market and find you a new replacement tenant upon their departure, this qualifies as an expense that can be deducted.
5. Insurance premiums.
There are several types of insurance premiums that landlords might be able to write-off on their taxes this year. The most obvious is landlord insurance, which covers a property owner from financial losses incurred as a result of owning rental property. Landlords may also be able to deduct the premiums paid for other casualty, theft, flood, fire, liability or auto insurance (assuming the vehicle is used for business purposes). Health insurance premiums may also be deductible if you pay towards your employees’ health insurance.
The key to capturing all of these tax write-offs, of course, is keeping detailed records throughout the year. One of the biggest reasons landlords panic around tax season is because they don’t have a firm grasp on their expenses. They pledged to keep invoices and receipts more organized this year, but inevitable, failed to do so – it happens to the best of us! If this sounds like you, it might be time to consider hiring a property manager (particularly if you self-manage multiple properties).
We also suggest hiring a CPA or tax advisor. These professionals are trained to know the ins- and outs- of the tax code and will be able to help you take full advantage of these (and other) tax write-offs. After all, if you’re going to invest in real estate, you might as well realize all of its benefits! Also, the tax benefits are right at the top of that list.
Go with the Multi-Family Pros at National DoorStep 844-APT-TRASH