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5 High-Value Tax Deductions Real Estate Investors Shouldn’t Miss

Jun 10 2017

Investing in real estate can be a great way to make some extra money or even support your long-term financial well-being into retirement, but it’s also a costly venture. Those in the know, however, understand that they can offset many of expenses associated with real estate investing through tax deductions. From mortgage interest to repairs, there are many accepted deductions for savvy property owners.

Do you know what deductions you should be taking on your properties? Here are five high-value deductions you don’t want to miss out on.

5 High-Value Tax Deductions Real Estate Investors Shouldn’t Miss

1. Interest Paid on the Mortgage

Very few real estate investors have the capital on hand to purchase properties without taking out a mortgage, and you shouldn’t be penalized for that. That’s why it’s an accepted financial practice to deduct interest paid on the mortgage on your taxes. If you pay any part of the utilities for your rental properties, you can also deduct those costs.

2. Depreciation

There are two kinds of depreciation that factor into you tax deductions as a real estate investor. One form of depreciation is depreciation on the property itself.

Although properties are typically perceived as increasing in value, this is typically due to improvements expressly made by the owner. Left alone, residential properties depreciate over 27.5 years and commercial ones over 30 years. You can write off depreciation—but you’ll have to pay for some of it in the form of depreciation recapture taxes when you sell the property.

The other form of depreciation that impacts property owners is less significant, but it’s still a write-off. This is depreciation affecting major purchases made to run your real estate business—think computers, vehicles, and other major purchases for business use. Typically, you have the choice to write off the purchase all at once or to calculate the depreciation over several years.

3. Business Travel

Here’s the thing about traveling as a real estate owner. There are some forms of travel that are relevant write-offs and others that might be more of a stretch. In general, the rule when it comes to deductions is that all deductions have to be ordinary and necessary for your business. Thus, something that constitutes a standard deduction in one field might not be acceptable in another.

Turning to the topic of travel, then, it would be considered ordinary and necessary to deduct travel to and from properties. This is a vital part of managing them—it’s the cost of doing business, and your taxes should reflect that. On the other hand, traveling to a conference that’s only tangentially related to your work but feeds a particular curiosity or a separate idea for a non-existent business wouldn’t make the cut according to the IRS. Interest isn’t cause enough.

4. Repairs

Unsurprisingly, repairs are absolutely classed as ordinary and necessary expenses in the world of real estate. As such, you can deduct the cost of any repairs and improvements you make to properties.

In one way, it’s interesting that you can write off not-quite-necessary improvements; you can deduct the cost of adding a room or installing a pool at a property, for example. This may seem above and beyond compared to repairing damages or even replacing out of date appliances.

At the same time, performing upgrades and renovations contributes to the increased value of your business, so it’s really just the cost of doing business in a competitive marketplace.

5. Legal Expenses

Finally, you can deduct any legal expenses you incur as part of managing your real estate investments—and we don’t just mean getting contracts drawn up. If you spend enough time dealing with properties, you’re eventually going to come up against some pretty tricky figures, whether it’s downright property thieves or simply tenants who fall behind on rent and drag out the eviction process. Writing off the costs of dealing with these issues won’t make them less painful, but it’s a small bit of relief.

Real estate investing isn’t an easy business. It takes significant capital, a lot of research, and continuous diligence to deal with both the property and the other people involved. Cut yourself a (financial) break along the way and make sure you’re claiming all your tax write-offs. It’s the least you can do.

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If you’ve ever considered investing in a few rental properties in Philadelphia or Bucks County, PA now might be a good time. Prices are still low in Philadelphia, but have been on the upswing. According to the National Association of Realtors, the median price of an existing home in a US metropolitan area grew 13.7% between July 2012 and July 2013, the latest in a 17-month streak of year-over-year price increases. 

New landlords can choose from properties that are likely to appreciate and a large pool of potential renters.Licensed realtor Pat Mueller cites a few reasons for this trend: “Many families have lost their homes to foreclosure and are entering the rentals market for the first time in years. Mortgages are also harder to get now, so fewer people are qualifying for a new one.”The more skills you bring to the table to get into Houses for Rent in Philadelphia Philadelphia or Bucks County, PA and the more time you have to devote to your properties, the faster you can make a return on your investment. 

But investing in rentals can also be disastrous (or too stressful to be worthwhile) without expertise. Here are three professionals you may consult about your new rental properties, and what you can do to mitigate how much they cost you:Handyman:  You may need to hire a specialist for some work on your rental. If you need new outlets or new pipes, for example, hire an electrician, plumber or licensed contractor. Handymen usually tackle smaller, more manageable tasks, like:

  • Painting and paint removal
  • Drywall repair
  • Minor appliance repairs (fixing a leaky toilet or faucet, among others)
  • Installing tiling or flooring, moldings, windows, doors
  • Refinishing decks, cabinets and other wood items

When You Could Skip It: You could do any (or all) of these projects yourself if you have the time and interest in learning. Of course, this only works if you live relatively close to your rentals and are flexible enough to service them on short notice. And if you’re willing to respond to the occasional 5 AM basement flooding.

Average Savings: Any base rates or costs-per-hour vary from location to location in Philadelphia or Bucks County, PA , but nationally, you can expect to spend an average of $60 to $85 per hour for repair costs. It general costs less to hire an individual handyman than a handyman employed by a company. Expect an additional charge if your job requires a trip to the store for materials.

Resident Property Manager As the owner of a handful of rental properties, you may be able to manage them yourself, but if you want help, a single resident manager would probably be more cost efficient than a property management company. Resident managers may:

  • Serve as a handyman
  • Advertise vacancies in your units
  • Show apartments to prospective tenants
  • Review rental applications
  • Collect rents

When You Could Skip It: Again, the closer you live to your properties and the more spare time you have, the less likely you are to need a manager. The obligations of being a boss will also cut into the time you save on maintenance.

Average Savings: The national median wage for residential managers is just over $25 per hour. Research the wages in your community and adjust according to how much responsibility your manager will take on. 

Real Estate Agent: Once you’ve gotten your financials in order and done your own research on the neighborhood(s) you’re considering, you might contact a realtor to show you potential properties. You can also arrange for a realtor in Philadelphia or Bucks County, PA to show rentals once they’re ready to rent.

When You Could Skip It: It depends. Even if you’re a local, or have thoroughly researched the neighborhood(s) you’re considering, a realtor is a great resource for a first-time rental buyer. Realtors have access to data and statistics not necessarily available to the general public and first-time buyers may not know all the right questions to ask. Using a realtor to fill your Houses for Rent vacancies is less of a no-brainer, depending on your other time commitments or whether you plan to hire a resident manager who could do the same thing.

Average Savings: As a buyer of rental properties, as when buying your own home, sellers typically pay most, if not all, of the buyer’s realtor fees. In this case, Mueller points out there’s little reason not to work with a realtor. For help in filling your units in Philadelphia or Bucks County, PA, the services of a realtor would set you back between 10-20% of the unit’s rent per month.  Mueller recommends interviewing with several brokers before making your final decision to invest into Houses for Rent .

The Bottom Line: As a new landlord, you can’t necessarily control the flexibility of your schedule or the amount (and cost) of unexpected repairs to your properties. Rentals are a long-term investment. However, to maximize profits from your Houses for Rent, new rentals, you can buy close to home and start small. It is best to begin with just one or two properties. This will allow you to maximize the time you spend on your properties’ needs, and minimize the amount you’ll have to pay anyone else.

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