Part of managing any investment property is accounting for all expenses that can be deducted at the end of the year for tax purposes. Not deducting these expenses could cost you thousands that would have been saved otherwise. All expenses should be recorded along with back up copies of invoices, statements, receipts, and even contracts that are assigned for each particular account. This will make the process of accounting for these expenses at the end of the year that much easier.
In the years that I have been managing properties I've been able to put together a list of common and not so common deductions that could result in considerable savings. With property returns highly dependent on every expense incurred, it's crucial to pay close attention to each one of these deductions. Although some may represent a smaller savings than others, remember that it's the cumulative effect of not accounting for these deductions that could have a vast impact on your profitability.
The following is a list of deductions that may prove to be very beneficial depending on your particular circumstances.
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In summary, this is just a brief list of common tax deductions on an investment property. Each one of these items involve intricate laws and special clauses that need to be considered. I always recommend consulting with a tax professional, i.e., CPA to ensure your deductions are both well documented and legal. You don't want to see yourself in a situation where something was deducted thinking it was perfectly fine only find to out that the deduction was never allowed to begin with.
In the years that I have been managing properties I've been able to put together a list of common and not so common deductions that could result in considerable savings. With property returns highly dependent on every expense incurred, it's crucial to pay close attention to each one of these deductions. Although some may represent a smaller savings than others, remember that it's the cumulative effect of not accounting for these deductions that could have a vast impact on your profitability.
The following is a list of deductions that may prove to be very beneficial depending on your particular circumstances.
- Maintenance Contracts: Contracts for cleaning, pest control, waste removal, roof maintenance, or any other service that is directly related with the upkeep and maintenance of the property. For some properties this could represent a considerable expense and should be reflected on your books.
- Repairs: A repair is when you fix a portion of a machine or part of a building that is not an improvement to the building. For instance, replacing a compressor on an A/C unit is a repair. Replacing the entire A/C unit is an improvement.
- Interest on loans: If your property is being financed through a mortgage, those interest payments are part of your operating expenses and can be deducted. This would apply to short and long term loans as well as equity lines of credit.
- Insurance: Property insurance is something you simply can not go without with any property. The insurance should be specifically for the property itself including fire, wind, and flood.
- Losses due to Casualty or Theft: If your property is damaged due to fire, flood, or wind damage, you may be able to deduct a portion or all of the cost of the repairs. The amount that can be deducted depends on how much of the property was damaged and how much of the repairs was recovered by your insurance.
- Legal and Professional Services: Attorney's fees are part of the normal scope of operations for your property. When leasing a space in your building you may need the assistance of an attorney to review the terms on a lease and this is a normal part of your expenses. The same holds true for property management fees.
- Utilities: The two most common are Electric and Water. Chances are that your property may have a common area that would require power for lighting and running equipment. Also, your tenants may not have independent water meters and this is being funneled through your regular operation expenses. This expense needs to be accounted for as well.
- Short and Long Distance Travel: You may own a property in another state or across town. Expenses may include fuel for your vehicle and airfare if you have to fly occasionally to the property.
- Property Taxes: Every year property owners are sent a TRIM notice stating the existing and proposed taxes for their property. It's easy to find this information and should be part of your profit and loss.
- Depreciation: Commercial properties can be depreciated over 39 years and residential over 27.5 years. If you haven't done so already, consult with your CPA to see what would be the best way to go about depreciating your building.
www.allrealtymanagement.com
In summary, this is just a brief list of common tax deductions on an investment property. Each one of these items involve intricate laws and special clauses that need to be considered. I always recommend consulting with a tax professional, i.e., CPA to ensure your deductions are both well documented and legal. You don't want to see yourself in a situation where something was deducted thinking it was perfectly fine only find to out that the deduction was never allowed to begin with.
written by: Victor A. Abreu