Your Tax Deduction Checklist
Great news everyone! The year 2020 is now, mercifully, in our rearview mirror. While many of the events of last year were unpredictable and unprecedented, we’re now at the time of year when we need to address a very predictable and recurring event: paying your taxes. If you’re a real estate investor, there are numerous deductions you can claim, including some you may not be aware of.
Before I get into the particular deductions, my number one piece of advice is to hire an experienced CPA. While it may be tempting to save some money by doing your own taxes, real estate tax law is extraordinarily complex and you could easily wind up paying more than necessary. It will be well worth your time and money to hire a CPA to make sure you follow the best approaches for your deductions and you take advantage of all of them.
Of course, when hiring a CPA, make sure they’re experienced and that their knowledge on real estate deductions are current. When you’re deciding if you’d like to hire them, or if you’ve already hired a dream CPA, these are some possible deductions you’ll want to discuss with them.
The way you depreciate an asset will differ depending on what the asset is. Different assets, such as a refrigerator or a building, will have different types of depreciation, such as straight line depreciation or accelerated depreciation. Regardless of the type, being able to itemize the depreciation of your assets will save you money.
2. Passive Activity Losses
Owning rental property is considered a passive activity. There are complex rules which apply to passive activities, but in short, they limit your ability to claim losses incurred in passive activity against other types of income.
You may deduct the expense of repairs that have occurred in a given tax year. Repairs are considered work that is necessary to keep your property “in good working condition”. They do not add significant value to a property.
Improvements are seen as adding value to the property. Improvements cannot be deducted in full in the year they incurred. Rather they must be capitalized and depreciated over their life.
4. Travel Expenses
Landlords are allowed to deduct certain local and long-distance travel expenses that are business related. Recording your mileage may seem like a nuisance, but that deduction can save you money.
You can deduct the interest you have paid on business-related expenses such as your mortgage, car loan, and business credit cards.
6. Home Office
You can take the home office deduction if you use a part of your home exclusively as an office for your business. You must conduct the majority of your business here to claim the deduction. The amount you can deduct depends on the percentage of your home that your home office takes up.
7. Entertainment Costs
Entertainment costs mean those incurred during business dealings. For example, taking a client to dinner or giving a potential investor two tickets to the theater are entertainment expenses.
8. Legal and Professional Fees
If you hire a professional to do work for you, the fee you pay to them is deductible.
9. Employee Compensation
If you hire someone to work for you, whether it be part-time, full-time, or freelance, you can deduct the wages you pay them as business expenses. This can include people who work for you on the investment side, or to a property manager or a live-in superintendent.
You can deduct your property taxes, real estate taxes, and sales tax on business-related items that are not considered depreciable for the year.
The premiums you paid on most types of insurance including health, accident, causality, theft, flood, fire, liability, vehicle, and health insurance for your employees can add up to a sizable deduction.
12. Casualty Losses
If your property was damaged by a catastrophic event like a fire, you may be able to deduct some or all of the loss. The amount you can deduct will depend on your insurance and the amount of damage to the property.
Keeping clear records of your expenses will help your CPA maximize your deductions, but if you didn’t keep detailed records of – for example – your mileage, the new year is a perfect time to start habits that will help you maximize your deductions for next year!