Real Estate Investors - What Numbers Should You Be Tracking for Tax Deductions?

Published: 9/23/2021 4:01:11 PM

One of the best ways to be prepared to file your tax return as a real estate investor is to know when the deadlines for taxes are. Below are some important upcoming deadlines you need to pay attention to, to be fully prepared to tackle tax season:

Extension Return Type

Deadline

S Corps

(Form 1120)

September 15, 2021

Partnerships

(Form 1065)

September 15, 2021

Corporate

(Form 1102)

October 15, 2021

Personal Returns

October 15, 2021

As any good investor knows, diversifying your assets is a smart move. You know flipping houses, investing in commercial real estate and rental homes can produce steady, recurring cash flow - which leaves a lot to track. You have your income, expenses, property manager payments, property taxes, and so much more.

This is why understanding what numbers you should be tracking for tax deductions is going to be very important. Thankfully, there are a handful of tax deductions that will reduce the amount of your tax liability. The lower your tax liability, the lower your tax bill and more money you save.

Types of Deductions

The biggest financial perk of this specific income stream is the real estate investment-specific tax deductions you can claim when you file your taxes. As a real estate investor, you’re qualified to deduct anything directly tied to the operation, management, and maintenance of the home. For example, you can deduct the following from your tax return:

  • Property Taxes
  • Property Insurance
  • Mortgage Interest
  • Property Management Fees
  • Cost to maintain and repair the building
  • Depreciation

If you work full-time as a real estate investor, did you also know that you can write off much of what you pay to facilitate and run your business? Qualified business expenses may include but are not limited to:

  • Marketing and Advertising
  • Office Space (Rental Expense)
  • Business Equipment (computer, car, etc.)
  • Professional Fees (Legal, accounting, etc.)
  • Office Supplies (business cards, stationery, etc.)
  • Business travel and meals

Fortunately, all of these deductions will decrease your taxable income, which will save you money when you file. Let’s look at a simple example of how these deductions can lower your overall taxable income.

Say you had rental income during the year of $25,000 but you had qualified expenses totaling $8,000. This means your taxable income for 2021 (or whatever year you’re filing in) would be equal to $17,000.

Taxable Income Example

Rental Income

$ 25,000.00

Qualified Expenses

$ (8,000.00)

Taxable income

$ 17,000.00

How to Track Your Tax Return Deductions

Generally speaking, all deductions you can apply to your income should be found in your financial statements. However, if your real estate investing is only one stream of income or you are just starting out, you may not have complete financial statements established.

Below we go into some of the tax deductions mentioned and how you can be sure all expenses are being included.

  • Property Taxes – What counts as property taxes? As an investor, you can deduct property taxes paid on vacant or occupied land.
  • Property Insurance – Everyone who owns a home knows that you have to have property insurance. Well, the same goes for real estate investments. You want to ensure the property you’re buying is protected, in case something happens to it during the build or flip phase. Keep all receipts of payment related to property insurance.
  • Mortgage Interest – If you finance your rental or flip, any interest charged to you is tax-deductible.
  • Property Management Fees – When you pay someone to help rent your house for you, typically, you deal with a property-management company that has a certain percentage of fee per home, this fee is tax-deductible.
  • Costs to maintain and repair the building – Any costs associated with the build, foundation, and process of flipping or buying a rental are tax-deductible. This can be small things like buying paint from the hardware store or large contractor invoices.
  • Depreciation – You are allowed to deduct the cost of buying and improving the rental property over its useful life. There are many ways to calculate depreciation so it may be best to rely on your accountant to ensure this total is correct.

Anything directly related to your business and its operations can be a tax deduction on your tax return.

Did you have to pay for flyers to gain attention from your target audience? Deductible.

Did you have a few business meals to discuss an investment opportunity? Deductible.

Did you have to pay a cleaning service to clean up the property? Deductible.

Any expense related to your business you should be tracking throughout the year and writing off as a tax deduction.

This is why it is crucial to keep track of these numbers so that tax time can be as stress-free as possible. The more you track and have receipts for, the better for your business.

Luckily, our accounting professionals at Katz Khayut & Stroll LLP are equipped to help you with everything from organizing accounting of your first real estate investment to managing the tax return of your commercial real estate business. By utilizing user friendly accounting applications and open communication, we make it easy for our clients to always be in the financial-know when it comes to their properties. Contact us at Info@kksllp.com today.