Investment Property Tax Deductions You Could Be Missing
By Kerry Curry, Contributing Writer, B2R Finance
April is just around the corner, which means it’s tax season. Most residential rental property investors know they can deduct their mortgage interest payments and property taxes, along with all ordinary and necessary expenses from their investment properties on their tax return.
But there are lesser-known deductions real estate investors may be unfamiliar with.
To tell us more about these hidden gems, we tapped the expertise of Dallas-based CPA and property investor Keith Borg of The Borg Firm. Borg and his wife, Jessica, have owned as many as 10 rental houses and currently own six.
Here are a few lesser-known deductions Borg suggests you may want to consider reviewing with your tax professional:
- Loan points: If an investor gets a loan to purchase a property, he or she can deduct the points of the loan when refinancing. In a loan payoff, the points are not specifically stated on a 1098 or HUD-1 so investors often forget about them, Borg says.
- Partial disposition of assets: This allows a dollar-for-dollar write-off on certain expenses. It is based on the producer price index for finished goods and depends on how long you owned the property and how the value has changed relative to inflation. Traditionally, you have to capitalize rehabilitation instead of being able to write it off. Under a partial disposition you can treat the replacement of something, such as an old roof, as a partial disposition in the year the roof gets replaced.
- Advertising: The cost of signage and advertising to market your residential rental properties is tax deductible.
- Mileage: Real estate property investors may deduct their mileage when they drive anywhere for their rental activity. Borg suggests using a mobile app such as Mileage IQ to automatically track mileage and make your accounting of this deduction painless.
- Homeowners’ association dues: These are deductible on rental properties.
- Credit card interest: Interest paid on credit cards used to purchase goods or services for rental properties can be deducted.
- Quick depreciation: When you buy a single-family property, you typically depreciate assets over 27.5 years. However, you can depreciate carpet, appliances and fences over five years, and they are subject to a 50 percent bonus depreciation in the first year. “If I spend $1,000 on carpet, I can take a $500 bonus depreciation immediately and depreciate the remaining $500 by $100 a year over five years,” says Borg. This allows for an immediate deduction of $600 in the above example.
Borg advises that clients talk with their accountant to make sure their investment and tax strategies are aligned.
A tax strategy to legitimately maximize all deductions and minimize the amount of taxes paid could result in an investor showing a negative adjusted gross income on their tax return even if they are generating strong financial returns, he says. While this may be good for paying less to Uncle Sam, it could affect a lender’s willingness to finance future property purchases with the investor.
An investor may even want to send a draft tax return over to their lender to be reviewed before filing their final tax return. This could make sure that they will continue to qualify for loans, especially if the tax return is showing a loss, Borg says.
“There’s nothing wrong with backing off on a few expenses. Maybe you’ll decide not to take the auto mileage deduction or some other deductions to bump up your income,” Borg says. “A lot of people would rather pay an extra $1,000 in taxes and continue to qualify for loans.”
B2R Finance offers rental investors innovative lending products to help unlock equity from existing portfolios and provide the cash needed to build rental portfolios nationwide. For more information about how B2R can help you obtain rental property financing, just call 800-227-8107 or visit http://www.b2rfinance.com/apply-now and follow us on Twitter @B2RFinance.
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