Sourcing deals, discovering reliable contractors and staying up on current renovation and rehab trends is tricky enough. Finding tax deductions for real estate investors shouldn’t add to your stress. And that is where we come in to help!
Below you’ll find tax deductions for real estate investors with the forms you’ll need and plain english explanations. We’ll continue to update this guide so it is as current as we can make it, and so you’ll stay in the loop on how to save when it comes to your taxes.
If you know someone that will benefit from these real estate investor tax deductions, feel free to share this post with them on social media or in a newsletter.
When you invest in and subsequently sell property, any profits made from that transaction are considered capital gains and become part of your taxable income.
However, Section 1031 U.S. Internal Revenue Code, often referred to as the 1031 Exchange, allows investors to avoid capital gains taxes when they use the proceeds from the sale of an investment property to reinvest in another property.
To leverage this deduction, you must identify a like-kind property of interest within 45 days of selling the previous property and invest in the new property within 180 days.
Tax forms requirements:
Click here to read about the ins and outs and how to use a 1031 exchange.
Depreciation is often described as the loss of value in a property, particularly due to wear and tear over time.
Real estate owners and investors who choose lease or rent property to consumers or businesses can leverage depreciation as a deduction, but the nature of it shifts slightly from the general definition of depreciation.
In this case, property owners and investors can deduct the costs associated with purchasing and improving a rental property.
To deduct depreciation, you must own the income-producing property and the property must be available and ready to rent.
Tax forms requirements:
Though the cost of client gifts can be deducted, business owners can only deduct up to $25 per gift, even if the gift exceeds that amount. If you intend to deduct these types of gifts, it’s important to keep detailed records that support your claim.
Keep in mind that the Tax Cuts and Jobs Act (TCJA) adjusted tax code regarding entertainment deductions. If you’ve claimed entertainment as gifts in the past, you may need to update your approach.
Now, entertainment gifts are only considered as such if you do not attendant/participate in the event with the client. If you attend/participate, it is considered an entertainment expense and cannot be deducted.
Potential tax form requirements:
Under the U.S. tax code, rental income is considered passive income, and thus losses from that income are passive losses.
Basically, if your real estate property or investment is a source of losses, you may be able to deduce those losses under certain circumstances.
If your AGI is $100,000 or less, you can claim up to $25,000 in property losses. If you make between $100,000 and $150,000, you may still be able to collect but deductions will be gradually reduced.
It’s also important to note that, according to the IRS, property loss deductions are not available to anyone who “[holds] any interest in a rental real estate activity as a limited partner or as a beneficiary of an estate or trust.”
Potential tax forms requirements:
Self-employment tax consists of social security tax (12.4%) and Medicare (2.9%). For some self-employed individuals, that can turn into a considerable tax bill each quarter.
Fortunately, self-employed real estate professionals can deduct 50% of their self-employment tax.
Potential tax form requirements:
Self-employed individuals that report a net profit can deduct their health insurance premiums, including those paid to cover premiums for their spouse, child/children (under 27), or other dependents. This includes both medical benefits and dental benefits. If you don’t report 100% of your premiums paid, then you may be able to include medical expenses as itemized deductions.
Potential tax form requirements:
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