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Real estate investing has huge tax benefits – if you know what you’re looking for.

by xyonent
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As you know, one of the big benefits of investing in real estate is the tax benefits. Many investors I meet for the first time have a rough idea of ​​depreciation, renovation costs, operating costs, and so on. However, many people are unaware of the steps they need to take to maximize their deductions, or the costly mistakes that could attract the unwanted attention of the IRS.

Expenses

When filing their tax returns, many investors Messed up What expenses are allowable? to be deducted What is and what is not? The breakdown is as follows:

Allowable Expenses

  • advertisement: All expenses related to advertising the property. These include the cost of placing the online ad and all the costs associated with advertising, such as cleaning the apartment, staging, renting lighting equipment, and hiring a photographer for the shoot.
  • Car and Travel: Expenses Occurred trip Donate to the property for upkeep.
  • Cleaning and maintenance: Rental property maintenance, whether it’s daily, weekly, monthly or even between tenants, is a legitimate expense, as is the cost of the cleaning products you use.
  • commission: If not withheld, commission paid to an agent or property manager is a qualified expense.
  • Depreciation: The IRS allows you to deduct a certain amount (usually 3.636%) from your taxable income for each year you own or rent the property to account for investment wear and tear. Depreciation on real estate can be claimed annually for 27.5 years. this You can keep your taxes low, May Tax rates could be further reduced.
  • insurance: this is Selection subjects Especially in a state like Florida, It is prone to extreme weather.
  • Legal and professional fees: This includes a variety of costs, such as preparing a rental agreement, paying viewing fees to an agent or property management company, and legal fees in the event of eviction.
  • Administration fee: If management fees are not withheld from the rent but are paid directly by the landlord to the management company, to be deducted As an expense.
  • Mortgage interest: Interest paid on a mortgage on a rental property.
  • Other interests: Interest paid on hard money loans in a BRRRR scenario and other loans related to the rental property, such as business credit cards for repairs and other expenses.
  • repair: all Investment-related repairs, from major renovations to cleaning and Paintings between residents Maintenance of home appliances.
  • Supplies: This includes a wide range of possibilities, from cleaning supplies to stationery, smoke detector batteries, bathroom essentials, plug-in air fresheners for the hallway and much more.
  • tax: another big The expenses are property taxes and other taxes associated with the property.
  • utility: All utilities paid by the landlord, such as hallway and outdoor lighting, water and sewer for the entire apartment, and heating (water, sewer, gas, and electricity), are legitimate deductible expenses.

Other Expenses

Many other expenses do not fall directly into the above categories, but are still eligible to reduce the tax you owe. These are typically:

  • Bank fees (related to property management accounts).
  • Homeowners Association (HOA) fees.
  • IT office costs such as telephone and internet as they relate to property management.
  • Landscaping.
  • Licenses and Permits.
  • Pest control.
  • Security services.
  • Snow removal.

Disallowed Expenses

  • Capital Expenditures: these Permanent structural changes to real estate are Strengthen These include building a fitness room or replacing an apartment’s kitchen or bathroom. repair It must be capitalized and depreciated.
  • Personal expenses: Gasoline for your car cannot be expensed it is Use your car for personal use, even if it is for commuting to work. Certain work-related travel, such as overseeing maintenance or showing properties to prospective tenants, is prohibited. Described by item With proper documentation, mileage can be expensed. Similarly, personal vacations cannot be expensed. as a wholeEven if you are working in the real estate industry locally.

S Corporations and LLCs

S Corporations and LLCs useful It is an asset protection measure, but it is unnecessary from a bookkeeping standpoint. in fact, Rental property owners should generally avoid using an S corporation for rental properties because the tax basis of the assets does not increase upon the death of the shareholder, and there are other reasons, too long to go into in detail here.

If the rental property is held in an LLC or S corporation; should be Supported bank accounts Financial affairs of each organization.

Be cautious when using Real Estate Professional Status (REPS) for tax benefits

REPS can be a powerful tool for investors who can legally document it. 750 hours, 50% for real estate business Genuine Real estate transactions or businessesHowever, small/part-time landlords often abuse this, and countless audit and tax court cases strongly suggest that it is virtually impossible to qualify for this while also having a full-time job. However, if you have a spouse, you can still receive the REPS benefits. get a qualification File a joint tax return.

To qualify, investors must maintain a detailed log of their real estate activities, including dates, hours worked, and job duties. This documentation is essential to prove their qualifications as a real estate professional.

Why do real estate investors get audited?

Real estate investors get audited for much the same reasons that most self-employed people do – they confuse personal and business expenses and claim expenses that they are not entitled to. relay Very helpful Along with thisInvestors can use multiple free checking accounts to separate funds by asset and expense categories.

Other reasons include:

  • Double-dipping on operational costs and capital expenditures (both expensed and depreciated).
  • Accidentally Real Estate Professionals (REPS) Billing As mentioned above, the status.
  • Inaccurate income reporting by nReport all rental income.
  • Misclassification of CapEx and OpEx Rather than capitalizing and depreciating it.
  • Exaggerating deductions, e.g.Inflating expenses or improperly deducting ineligible items.

Please note that depreciation is one of the notable benefits of investing in real estate in the United States (many foreign countries do not allow depreciation or allow much less than the United States does). If handled properly, Huge Owning an investment can provide benefits, whether in terms of cash flow or other benefits, but proper accounting is essential to capture these benefits.

your Own bookkeeping

your Own Bookkeeping is a cost-effective way to get started in real estate investing until you have 4-5 properties. At some point, you may want to hire a professional to help you 1) ensure To be treated 2) Free up time to focus on tasks that grow your business, like acquiring deals, raising capital, and maintaining your portfolio. Properly managed. and relayYou can assign secure access to your account to your accountants and other collaborators with different permission levels, such as read-only or bill payer, so they can easily hand off these types of tasks without multiple back and forth.

General Tax Benefits Some Investors Are Overlooking

A qualified tax accountant who specializes in real estate should know all the tax benefits available to their clients, but I’m amazed at how many investors I see with expenses that their previous accountant clearly overlooked. These expenses include:

  • You are missing out on all the available depreciation.
  • We did not use cost segregation studies.
  • Investors fail to claim REPS even though they are duly entitled to it.
  • Not using a tax-efficient exit strategy, such as a 1031 exchange, to minimize taxes upon sale.
  • Not claiming other potential deductions, such as a home office, business vehicle, or business mileage.

Tax strategies to increase cash flow and accelerate scale-up for investors

All available tax strategies, when implemented, can help increase profits and allow investors to grow their portfolios. However, some strategies that are particularly useful include:

  • Cost Segregation: This has become a buzzword lately. It accelerates the depreciation of items such as appliances that depreciate faster than other parts of a property, improving cash flow.
  • 1031 Exchange: This tax code greatly benefits real estate investors who want to defer capital gains taxes when they reinvest in like-kind real estate.
  • Tax Credit: Multiple tax credits for things like energy efficiency improvements are often overlooked, but can result in significant savings.

Final thoughts

The US tax code is designed to help businesses generate revenue.,and it is It is especially advantageous for real estate, with 1031 exchanges, depreciation, REPS, etc. that are conspicuously lacking in other countries. It requires a sensitive, meticulous and customized approach You can get maximum tax benefits from your investment.

Investors can suffer significant losses if they misuse expenses, misrepresent important information or accept incorrect advice.

This article is sponsored by Relay

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Relay is an all-in-one business banking and cash management platform that gives you complete clarity into your cashflow.

This article was written in collaboration with tax strategist and investor Thomas Castelli. relayis an all-in-one business banking and money management platform that gives you complete transparency into your cash flow. Thomas is dedicated to helping real estate investors keep more of their hard-earned money in their hands.

BiggerPockets notes: These are opinions expressed by the author and do not necessarily represent the opinions of BiggerPockets.

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