Many taxpayers use their home purchases as a way to save money on their tax liability for the year. However, the IRS also allows taxpayers to buy properties for investment real estate and use the eligible deductions to reduce their tax bills. Several of the same home deductions that apply to residences also apply to investment real estate properties.
Why Claim Deductions for Investment Real Estate?
Deductions for investment real estate are a great way for taxpayers to cut their tax bills. This is especially true for those who are earning significant income from their investment properties such as collecting rent or vacation home income. However, even if the taxpayer is not earning much investment income from real estate, the deductions from it can be used to offset other income such as earnings or self-employment revenue.
What Expenses are Eligible as Deductions?
Several real estate deductions are available for investment properties. These include:
- Mortgage interest and property taxes: One of the biggest expenses on an investment property is the interest on the monthly mortgage. This is especially high in the first couple of years of home ownership, when the majority of the mortgage payment is applied toward interest. Mortgage companies often report the total of the interest paid at the end of the year, making it easy for property owners to deduct it on their returns. Taxpayers can also deduct the amount of property taxes that they remit each year as an eligible deduction.
- Depreciation: As the home depreciates, or loses value, real estate owners can deduct this expense against their real estate income. While depreciation reduces the taxable investment income, it does not affect the home's actual value, which will continue to rise in a good housing market. However, unlike mortgage interest, depreciation must be deducted over several years. The IRS requires that property owners write off residential rental property depreciation over a period of 27.5 years. For commercial rental property, depreciation is written off over 39 years.
- Maintenance: The costs associated with property maintenance are also deductible for those who own investment real estate. These expenses include repairs to the structure itself or to the appliances within it. Property owners can also write off the costs of redecorating or cleaning up after a messy tenant.
Investment real estate taxes can be a significant source of passive income for taxpayers. It can also yield a large amount of overlooked overlooked tax deductions to reduce a taxpayer's tax liability. Learning which expenses are eligible for deduction can help taxpayers claim all of the tax deductions they are entitled to receive.
