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A Beginner’s Guide Real Estate Tax Deductions (Commercial vs. Residential)

July 05 2018
by Leisl Bailey

Real estate tax

 

Let’s talk about real estate tax deductions.

We’ll try to make it as easy as possible to understand, while not completely boring you to tears. But really, we’re talking about taxes, so no promises.

As per usual, here’s the disclaimer about Clever not being a CPA or any other accountant and while this information is fact checked, you should consult your accountant (preferably one who knows a lot about real estate) before taking this as gospel.

Now that we’ve got that out of the way let’s dive in!

As you twiddle your thumbs and think about what real estate to invest in make sure you consider the taxes. Residential and Commercial real estate all have their perks and detriments, but which will help you make the most money at the end of the day?

Although this depends largely on your situation, to make it a bit simpler to understand, we are just going to pretend that you are married and filing jointly.

Deductions for the Part-Time Investor

Commercial and Residential deductions have a lot of similarities. If you are a part-time real estate investor, meaning you have another job and primary source of income, these are the deductions you can expect on your taxes.

Repairs

Many investment properties need repairs and improvements to some degree. Whether the repairs are as big as gutting the building and rebuilding walls or simply patching a few holes and painting, save the receipts and list it on your taxes.

Interest

Did you know you can write off the interest on your loans that you’ve paid in the last year? It makes those monthly payments a bit less stressful when you can proudly write it off at the end of the year! This includes the interest on your mortgage, Home Equity Lines of Credit, and any other loans you may have against your home. Pretty great, huh?

Depreciation

Claiming depreciation on your property is one of the biggest deductions you will take as a real estate investor. When you claim depreciation, you are saying that because you have a tenant living in your rental property or running a business out of it, it is depreciating. You calculate the depreciation value of each property over 27.5 years and can continue deducting it for 27.5 years.

One caveat, however. When you go to sell the property, you will have to pay back a portion of the depreciation you claimed. The amount you pay back is actually quite large, depending on how long you have owned the house. The hope is that the amount you are getting from selling the property is significant enough to not worry about the amount you pay back.

Casualty Losses

Accidents and nature happen. Luckily, there’s a tax write off for that as well. While fires and floods aren’t something we hope happens to our investment properties, it’s nice to know you can get a small breakthrough taxes.

Insurance

You can also write off the insurance premiums you have on your properties. This includes private mortgage insurance as well as your policy that covers your properties.

Professional and Legal Services

Do you have a property management team? What about a lawyer for your real estate? You should at least have an accountant. These are all write-offs! You can even write off any education or mentorship costs that you have.

Maximum Write-Offs

If you are married and filing jointly, and only do real estate on the side, you can write off as much as $25k, if your income is less than $100k. If you are making $150k while doing real estate part-time, you can’t write off anything.

Tax Deductions for Full Time Real Estate Professionals

Full-time real estate professionals are investors who work full-time in their real estate business. To be considered full-time real estate professionals, they must work a minimum of 750 hours a year in their investment business. Full-time real estate professionals can deduct the same items that part-time real estate investors can, but they have even more significant tax breaks. Here are some of the bonus deductions they get.

Travel

Whether the property you’re investing in is down the street or across the country, the journey is a write-off! You can write off a portion of your car, the flights,  gas, hotel stay, dinners when traveling, and locations for meetings. Be sure to keep your receipts and track it all, so you know how much to deduct come tax season!

Home Office

Do you work out of your home? If the office has a door, closet, then you can write it off! You can also write off office expenses like your computer, printer, paper, etc. that was bought in that taxable year. The office must be only used as an office, however. You can’t write it off if it also doubles as the guest or baby’s room.

Employees

Do you have a team of employees you work with? Many have a crew that does the repairs or an office assistant and bookkeeper. They’re write-offs, too!

Note About Full Time Real Estate Professionals Tax

While part-time real estate investors have a cap on their deductions, full-time real estate professionals do not. Full-time real estate professionals also do not pay income tax, unless they structure themselves under a c-corporation or similar structure where you pay yourself a salary. To decide how to get the most from your tax deductions, talk to your CPA.

The Difference Between Commercial and Residential Tax Deductions

There are a few differences between commercial and residential investment tax deductions. The biggest difference, however, is in the amount of money they make vs. the number of investment properties. Investing in commercial real estate is going to give you the largest deductions because you are playing with more money. Commercial investors also typically invest in properties under a corporation rather than individually, so the tax deductions are going to be structured differently.

Investing in real estate is a breeze with a great flat-rate agent by your side. That’s why we created Clever. Clever partners with only the best real estate agents in your area to get you the help you need at a fraction of the price of a regular agent. Call us today at   1-833-2-CLEVER or fill out our online form to get started.

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