What Are the Current Tax Incentives for Property Investors?

Most real estate investors, unsurprisingly, subtract charges such as mortgage interest, insurance, taxes, and typical operational expenses such as upkeep and repairs. However, there are several additional tax breaks that investors should take advantage of while completing their tax returns.

The Cost of Looking for Property

Hotel, flights, rental cars, meals, and other travel expenditures made when searching for a new home are deductible if they are regular and necessary.

To be eligible, at least half of the time spent away on business must be spent on business, and the trip’s primary goal must be business. This implies that investors may deduct travel expenditures for a long weekend in Florida as long as they spend the bulk of their time doing business.

Cell Phone and Internet Plans

Owners who use their internet and mobile phones for commercial purposes may deduct a portion of their expenses. It may be difficult to distinguish between personal and commercial use, but the key is to be fair and consistent, and to maintain records.

Owners may utilize the difference between the projected number of hours worked per month and the total number of hours in a month to determine the percentage of their expenses spent on their company. More information on this topic is available at adviseretax.com if you need further clarification.

Deducting Passive Losses

Rental and commercial losses may be deducted from any revenue earned by real estate professionals. This includes money lost as a result of unpaid rent. There is a $250,000 single filing limit and a $500,000 married filing joint restriction until 2025. The limit will be removed in 2025.

Rental property losses that are not immediately subtracted are referred to as deferred passive losses. These losses accumulate endlessly until one of two possibilities occurs:

• The owner has passive income to deduct (from a rental house or otherwise).
• The property is sold or transferred by the owner.

When selling a property, investors may deduct the suspended losses, but only if it is classified as a single activity for tax reasons. Because many investors regard one or more of their properties as a separate operation, selling only one would not enable them to deduct the suspended losses.

Finally, the sale must be to an unrelated property and recognized as a taxable transaction; therefore, 1031 exchanges do not qualify. Foreclosures qualify.

Property Management Fees

Property owners may still minimize their tax obligations by deducting property management costs, which are classified as administrative expenditures and are fully deductible. Owners who manage their own rentals may deduct expenses such as annual fall maintenance, tenant screening, and advertising.

Insurance

Rental property insurance rates, which are 15% to 25% more than homeowner’s insurance for owner-occupied homes, may be deducted by real estate investors. Those who work from home may also deduct a portion of their main house insurance.

Document Expenses

If owners have papers printed, bound, laminated, delivered, or otherwise processed, the expenses are deductible as long as they are for commercial purposes. They cannot, however, deduct:

• Legal costs for purchasing corporate assets. Owners may be able to combine these with asset depreciation.

• Fees for personal labor, such as putting rental property into a trust. If an owner bills for something that serves both company and personal purposes, they must separate the two, and deduct just the business portion.

Selling to an S Corp

For federal tax purposes, S companies (https://taxfoundation.org/taxedu/glossary/s-corporation-s-corp/) chose to pass through company income, losses, deductions, and credits to their shareholders. In exceptional cases, an owner may be able to sell their property back to themselves by forming an S company.

Selling a property to your S Corp., for example, may enable you to conceal the appreciated value under capital gains protection. Selling to an S corporation may be difficult, and this strategy should not be adopted by everyone. Before taking this approach, owners should speak to a tax professional.

This is why owners must understand how to choose the appropriate legal company for their real estate investing firm. Owners should constantly search for methods to increase their return on investment.

Taking advantage of these important property tax deductions is an excellent way to protect your income as a real estate owner.