Top 15 Real Estate Tax Deductions For Rental Property Business
Real estate tax deductions are an investors best friend. Having real estate tax deductions will help us to save more money because we pay less in taxes.
We are not evading taxes, we are using laws that are on the books to help us save as much money as possible. Real Estate Tax deductions are your best friends when it comes to reducing the amount of taxes you will owe.
Real Estate Tax deductions will not only save you money but will also make you money in the long run.
Here Is How Real Estate Tax Deductions Will Make You Money
As you pay less in taxes, because of your real estate tax deductions, you will have more money saved for future investing.
As you save money year after year, all of the money saved from the tax deductions can be used to buy more investment properties.
I hate paying taxes, but as investors we need to pay them. It is what it is. If you are living anywhere in the world you need to pay them. There is even a death tax! Can you believe it?! When you die, you are going to give the government even more money.
The government is so creative in finding ways to take money from you!
That is why you need to be creative in finding real estate tax deductions to save you money.
Taxes – Nothing As Certain As Death and Taxes
- If you have a dog, you have to pay taxes, because you need to buy a license.
- You even have to pay a tax to go fishing.
- If you want to own a car, you pay a registration tax
- When you own a cell phone, you pay another tax
- If you buy a can of soda, there is another tax
- When you use electricity, there is another tax
- When you start a business, there is another tax
I Have To Pay How Much In Taxes?!
Today we are looking at taxes and the tax benefits we can get because of the business we have in real estate rental properties. It is sad that if you have a job, you basically need to work half of a year in order to put money in your pocket.
On average, anywhere you are living and working in the U.S., 50 percent of your income will go to the government in taxes.
You need to work six months, SIX MONTHS, before you get any money that goes into your pocket. You may be thinking this is crazy, but I did a little research…
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State and Federal Tax
You have two types of income tax: state and federal. The highest state tax rate in California is 13.3 percent. Imagine: this is coming out of your pocket just because! The highest federal tax rate is 37 percent.
If you live in California, this equals 50 percent that you are paying in just state and federal income taxes. If you are living in a state that doesn’t have income tax, good for you! However, they are taxing you in other ways, like through property tax.
In California, the sales tax is an average of 9%.
This is what you pay on everything you buy!
In Marin County, California, 4.86 percent of your income goes to property taxes. You may be thinking that property tax is based on the value of your home.
However, the average price of the home to the average income equals 4.86 percent of that person’s income.
When you go to a hotel or an AirBNB, you will pay an occupancy tax. Just because you go and live in somebody’s place, the government is going to charge you a tax.
Can you believe that?!
But Wait, There’s More!
As if that isn’t enough, we cannot forget about excise tax. Most people don’t even realize this one!
- Cigarettes: On average, the tax is $.87 per pack
- Gasoline: Per gallon, the tax is $.36; they’ve already passed laws to raise this
- Liquor: Per gallon, the tax is $3.30
- Beer: Per gallon, the tax is $.20 per gallon
- Cell Phones: The tax is roughly 10%
- Recycling: In CA, you pay $.05 – $.15 per container
If You lived in California…
State Income Tax: 13.3%
Federal Income Tax: 37%
Sales Tax: 9%
Property Tax: 4.86%
Total: 64.16% Tax On Your Income
This total does not including taxes for Medicare and Social Security! This is 64.16 percent just in taxes. This is ridiculous! You need to work more than half a year, just to pay these taxes!
Capital Gains Tax vs. Income Tax
If we look at real estate rental properties and what we invest in, we need to look at capital gains tax instead of income tax. Right now, the capital gains tax rate is 15 percent.
Remember, if you live in California, state and federal income tax is 50 percent. If you have rental properties, your capital gains tax is 15 percent. We are talking about long-term capital gains — any profit that goes into your pocket (not flipping houses).
You only pay 15 percent on your rental property profit, which means you get 35 percent more in your pocket. That is so much better!
We don’t want to evade taxes though.
What we want to do is use the laws to figure out ways to lower the tax burden. If you do that, you pay less in taxes. The first thing to do is talk to your accountant.
Your accountant will be able to help you understand what you can do to reduce your tax burden. If you spend $100 for an hour of their time and they save you $2,000 a year, that is money well spent.
I talk to my accountant all the time. He makes sure I pay as little in taxes, legally, as possible.
TIP: Be organized
Organize all of your receipts and expenses and have everything written down. The last thing you want to do is give your accountant a shoe-box full of receipts and notes, because it is going to take them longer and it will cost you more money.
From the beginning of the year, be very organized and make sure everything is in order and everything is written down. Every time something comes in, I put it in an Excel sheet and I track everything.
If you are managing your properties yourself, there is a free online software called Cozy. This is how I track the expenses of properties I manage myself, and I highly recommend it.
Your expenses and income can be tracked in the software and printed at the end of the year to give to your accountant. Go to my website, www.masterpassiveincome.com/cozy, to learn more.
Top 15 Real Estate Tax Deductions For Your Rental Business
In the IRS tax code, we are able to deduct expenses and depreciation of properties, and we are going to go through it all today. I want to give all of you these tips to reduce your tax burden.
As a real estate tax deductions, you can write off all of the expenses you have for a property in that calendar year.
If you make $1,000 a month on a property and you have expenses (not repairs) like yard maintenance, utilities, insurance, taxes, interest, advertisement, etc., these can be deducted from the income.
Make Sure Your Expenses Are Current
However, your expenses need to be current and have short-term value. If you replace a hot water heater, that is not an expense, that is a repair and it improves the value of the home.
The expenses must be related to the rental activity, which includes business expenses like cell phones (the purchase and the plan). If you are flying to other areas to look at properties, you can deduct those expenses. Talk to your accountant to make sure you deduct these expenses.
Anything that increases the value of the property or extends the life of the property can be depreciated over multiple years. Let’s say you replace the roof and it costs $6,000.
That is considered a capital expense, because it is making the property better. Instead of having a real estate tax deductions of $6,000 in one year, you deduct it over a period of time.
Just to be clear, I am not a tax expert. I love paying my accountants, because they do things I don’t like to do and they save me money! Talk to your accountant to learn more about the top 15 tax deductions for investors that I explain below.
Mortgage Real Estate Tax Deductions
You can write off the interest on any mortgages you have on your properties. Any money you paid out to get the loan, like points, can be written off.
Let’s say you paid $1,000 a month for the mortgage and $800 in interest. You are only taxed on the $200 difference.
Depreciation is fantastic! If you buy any real estate, the value goes up, but the IRS allows you to depreciate it over 27.5 years. If you buy a house for $100,000, over the next 27.5 years the $100,000 will be deducted every single year, proportionately.
Your income will be lower for tax purposes, because you have depreciation of assets. Windows, carpet, counter-tops, appliances — anything that is physical for your business can be depreciated over time.
Repairs and Maintenance
You can deduct expenses for repairs and maintenance. Repairs means anything required to maintain the current condition of the property, like paint, carpet, fixing the air conditioning, making sure faucets run —any type of repair that is needed to make sure the unit is good for the next tenant.
Any maintenance you pay like landscaping, pest control, pool cleaning, lawn mowers, light bulbs, smoke detectors, etc., can be deducted. Keep track of every single expense you have for your property and talk to your accountant.
Real estate property taxes are definitely something you can deduct, because the cost is reducing the amount of money you are bringing in. If you pay $2,000 in property taxes a year, but you made $5,000 in rent, you are only taxed on the difference — $3,000!
If you pay Social Security, Medicare, and unemployment taxes for your employees, you can write that off. You can write off personal property taxes, like for vehicles that you take to get to your properties.
Any insurance premiums that you pay can be a deducted. This includes homeowners insurance, PMI, fire insurance, flood insurance, theft insurance, workers’ compensation, and umbrella insurance. Talk to your insurance agent to make sure you have the right insurance coverage for each property.
Any utilities you pay for your property like electric, gas, and water, you can use as a deductions. Trash and sewer are also included in this.
If you have a vehicle you use to drive to and from your properties to make sure they are managed correctly, you can deduct mileage, gas, and repairs. You can even deduct registration fees as long as the vehicle is used for business.
Any expenses incurred to travel to your current properties or potential properties can be written off. You can deduct the cost of airfare, car rentals, hotels, food, etc. I can write off fees and travel expenses if I go to a conference, but if I take my family, I cannot write off their expenses, because they are not attending or working for my business.
However, I can write off my hotel room, even though my kids are staying there, because I need a place to stay and the trip is for my business. If the conference is over and I extend my stay, I cannot deduct those expenses, because that is for personal use.
Keep track of all of your travel expenses because they are great real estate tax deductions.
You can deduct fees for any property management company that you use, association fees, special assessment fees — anything you pay out of your pocket to manage a property.
Legal and Professional Fees
Any accounting fees or attorney fees can be deducted on your taxes. This means that you can write off the cost of filing your taxes, even if you just use tax software! If you need to hire an engineer to do some work on your property, you can include those expenses.
Office or Operating Expenses
Any office expense you have can be written off like ink, legal forms, paper, pencils, and software. If you have a home office, you can write off some of the square footage of your home. If you have an actual office space, you can write off the rent you pay for it. You can include computers, laptops, cell phones, speakers for your computer, and cameras if you use them for your business..
You can deduct any expenses for advertising. If you advertise on Facebook, the local newspaper, or Zillow to get people in your property, you can deduct it. Signs or banners are also included.
PRO TIP: Your Property Manager Pays for Marketing
You shouldn’t be paying any money for rental ads, because you have Craigslist, Zillow Rental Manager, and Cozy, which are all free for you to use. If you market your property with Cozy, they will actually advertise it on four or five other websites. Use my Cozy affiliate link to learn more.
Anything you would normally pay to your property manager to find tenants can be deducted on your taxes. If you pay a leasing agent, sales people, or tenant referrals, keep track of those expenses.
When you are starting your business, keep track of every expense you incur to get your business going. This can include home office expenses like desks or utilities. Keep track of the repairs or remodels you do on new properties to get them ready for tenants.
Keep track of seminar expenses that you attend. If you get into my Ultimate Real Estate Investing System, where I teach you step by step how to build your business, that is an expense that can be written off.
If you pay any fees, like parking fees, for your business, make sure to keep track of it! Any business licenses, permits, or fees can be deducted on your taxes.
These can all be real estate tax deduction you can write off and lower your taxable income!
Hopefully this has been eye-opening and hopefully you are still here with me — this is so boring! I try to make it as exciting as possible to make it through such a dull topic, but this is a big deal for us investors.
We want as little money as possible to come out of our pocket, so we can save it and buy more properties. As we buy more properties, we make more money!
This is why I am able to travel the world and move from California to Arizona, and Arizona to Idaho, and not have to worry about a job. I save as much money as I can by deducting my expenses and lowering my tax burden because of real estate tax deductions.
FREE Real Estate Investor Workshop
If you want to start investing in real estate, or if you are even curious about it, I have a free workshop for you.
Go to www.freeinvestorworkshop.com , and you will see how amazing rental properties are and how you can live the dream life and never work a job again.
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