Uncle Sam gives, and Uncle Sam takes away.
But in the case of buying local Metro Detroit investment properties… you can earn investment property tax deductions for your Metro Detroit properties.
For real estate investors, the United States provides the opportunity to earn a living purchasing investment properties… and holding those properties as investments, and of course the income from those properties is taxed.
But many new investors often overlook tax deductions that could have an impact on their bottom line. Today, we’re going to take a look that Metro Detroit MI real estate investors can take advantage of.
Income Sources You Can Potentially Deduct
- Repairs and expenses paid by rental tenants are considered income. This could include an emergency water heater repair that tenant took care of on his own. These repairs can be deducted.
- In some cases, tenants will trade repairs and upgrades to a rental unit for a reduction of rent. These services can be deducted, so long as they’re claimed as income, and must be charged at fair market value. You cannot work out a deal with your tenant to fix a light switch for three months rent, then deduct that ludicrous “income” on your tax return.
A security deposit is not taxable, based on the thought that your intent is to return this deposit at the end of a lease term. However, if a tenant breaks the lease and forfeits his or her deposit, you can claim the security deposit as income, so long as the deposit is used to make repairs.
These repairs are deductible expenses.
Make sure with your accountant or local property manager that they’re handing your security deposit accounting correctly so you’re not paying income tax on security deposits that you’ll be turning right around and paying back when a tenant leave.
Other Common Investment Property Tax Deductions
- Certainly! The passage you provided discusses various tax-deductible expenses related to owning and managing investment properties. Let’s elaborate on each of these points and provide examples for better understanding:
- Mortgage Interest:
- Elaboration: The interest portion of your mortgage payment, the amount you pay the lender for borrowing the money, is fully tax-deductible. This means you can reduce your taxable income by the total interest paid.
- Example: If you paid $12,000 in mortgage interest over the year, you can deduct the full $12,000 from your taxable income.
- Travel Expenses:
- Elaboration: Expenses incurred while traveling to and from your property for activities related to property management, such as making improvements, showing the property, or collecting rent, are considered work expenses and can be deducted.
- Example: If you drove 500 miles for property-related tasks and used the standard IRS mileage rate, you can deduct the calculated travel expenses based on the mileage.
- Other Deductible Expenses:
- Elaboration: Several other expenses related to property management are deductible. These include property taxes, insurance, tax return preparation costs, lawn and garden care expenses, losses due to theft or natural disasters, as well as legal and professional services fees.
- Example: If you spent $1,500 on property insurance, $800 on lawn care, and $1,000 on legal services, the total deductible amount for these expenses would be $3,300.
- Elaboration: Depreciation allows you to deduct the cost of the property over its useful life, accounting for wear and tear. This is a complex calculation and often requires assistance from a qualified accountant.
- Example: If your property has a depreciable value of $200,000 and an estimated useful life of 27.5 years, the annual depreciation deduction would be approximately $7,273.
- Home Office Deduction:
- Elaboration: If you use a portion of your home exclusively for your real estate investment business, you may qualify for a home office deduction. There are specific requirements for this deduction, and it’s essential to consult a tax advisor to ensure eligibility.
- Example: If 20% of your home’s total area is dedicated to your home office, you can deduct 20% of your home-related expenses, such as utilities and mortgage interest, as a home office deduction.
By understanding and appropriately applying these deductions, property owners can significantly reduce their taxable income and maximize their overall financial returns from real estate investments. It’s crucial to keep accurate records and work closely with a tax professional to ensure compliance with tax laws and regulations.
- Mortgage Interest:
By taking advantage of all applicable tax deductions, investment property owners can increase their revenue and reduce their tax liability, opening the possibility to purchase additional properties. There may be other ways to decrease your tax liability. Talk to your financial advisor or certified public accountant, as they typically keep abreast of new tax deductions that Metro Detroit investment property owners can claim.