Real estate can be an amazing vehicle to create long-term wealth. Not only for you but it can even become generational. Buying an investment property is to build equity and value over and above the initial investment of the property. One of the many important drivers of how real estate can provide the value and to build equity is the tax advantages it provides. With that in mind, it is important to use every deduction available to you to maximize the benefits. It can be easy to overlook items you can use.
Here are some things to think about. Did you buy or sell property in the current year, or are you anticipating transactions in the upcoming year? Make a copy of your closing papers for your tax person to review for important deductions. Otherwise, you may miss some very important items such as those listed below.
- Amortization of points and other loan costs on investment loans
- Fees paid for a new mortgage or refinance
- Exchange fees for 1031 exchanges of your properties
- Insurance, taxes, interest, and utilities paid during escrow
The following are deductions to track every year, so a good practice is to keep accurate records monthly.
- Mortgage interest
- Homeowner association dues
- Property taxes and insurance
- Professional fees – management, attorney, accountant, etc.
- All property management costs – management fees, leasing or other fees
- Advertising expense for vacancies
- Utility payments
- Miscellaneous repairs
- Added or replaced appliances
- Replaced or upgraded units, such as heating and air
- Bank maintenance, late charges and service fees
- Travel expenses incurred because of your investment
There are often times you will need to amortize certain deductions over a period of years. It is best to seek the advice of a tax professional on items such as those listed below.
- New paint, carpet, fencing, gutters, roof, and other major improvements
- A major loss to the property
Often the rental market dictates using incentives to lure tenants into properties. By all mean, your property needs to stand out above all the rest. This may be something you are contemplating for next year to offset vacancy losses. Fear not, these expenditures are also deductible. Here are some examples.
- Cable/satellite installation
- Free memberships in a local establishment
- Gifts, such as a free Thanksgiving turkey, ham, etc.
- Tenant insurance paid by the owner
- One month of water, sewer, and garbage, if applicable
There are probably more items to consider. Review your expenditures carefully for any costs you incurred on the property; be sure to consult and question your tax person on what items you may be able to use or ones missed. You want to use every expense possible but at the same time, honest and appropriate deductions to show the Internal Revenue Service that you are being reasonable and have valid deductions.
It is certainly not too late to plan for the next tax year and now is a great time to think about organizing for this one. Make your investment portfolio work for you.