Ok, I have been procrastinating with this one because I had to do some research but here goes. One of the huge positives of real estate lies in the fact that there exist numerous tax benefits. This occurs whether one owns her own home or a rental property. Let’s take a look at the main tax benefits for landlords.
1. Mortgage Interest. A no brainer. This rule applies to residential mortgages as well.
2. Property Taxes. NYC property taxes are not high but it is a nice benefit to write them off. This is especially true for three to four families that are taxed higher than smaller properties.
3. Insurance premiums. Nice benefit. I have relatively high premiums for my property so at least it is not a complete throw away.
4. Utilities/Repairs/Maintenance. Any utilities, repairs or ordinary maintenance are deductible.
5. Management Fees. Now, I self manage but if I spun off management to a a property manager, the fees I pay would be deductible.
6. Travel. Using a zip car to get to your rental? Hey, what if you are a long distance landlord and you have to stay overnight to get to your property? All these costs are deductible.
7. Home office. I don’t know if I would try this but if you can justify it, deduct it. I believe the IRS changed the rules to make it easier for taxpayers to use this deduction.
8. Depreciation. Depreciation is one of the most important tax rules that apply to investments. Depreciation allows a landlord to deduct the value of the structure, improvements(like a new roof or appliances), equipment over 27.5 years. So, lets say your property cost $100,000. You can depreciate $3636 each year. This is important because lets say you made a $5000 profit on your operating costs for a year, you then add the $3636 deduction(or subtract from $3636 from the income) to that number and instead of a taxable income of $5000, your income is $1364. You can also harvest these losses in the years you don’t make any profits for later years.
This is not an in depth discussion about taxes. There are other deductions but I see these as the main ones that most people use. I don’t necessarily manage with taxes in mind but I do keep excellent records for my accountant.
Talk to your accountant and keep good records! See some links below.
http://www.irs.gov/pub/irs-pdf/p527.pdf
http://www.irs.gov/taxtopics/tc414.html
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Tips-on-Rental-Real-Estate-Income-Deductions-and-Recordkeeping