With tax season well underway, the IRS has already accepted over 19 million tax returns from households and businesses of all scales. If you have a real estate investment business, you know that prudent filing will give you maximum tax benefits that can help you pay less or even get a refund in a few weeks.
While your tax software in basic mode can point out the obvious deductions like mortgage interest, there are other business expenses and sneakier deductions that can lower your taxable income.
So, sign up for a software upgrade to get every credit and deduction on your tax bill, or hire a CPA to ensure you get everything before you file. For your reference, we picked 6 of the sneakier deductions that can often go unclaimed by professionals new to the rental real estate sphere.
Disclaimer: This blog is for informational purposes only but not a complete guide. Please consult a tax professional for the most accurate and up-to-date information regarding tax credits.
1. Self-Employment Tax Deduction
If you are self-employed as a sole proprietor, LLC, or any other entity that receives real estate income, you may be eligible for a self-employment tax deduction. This can provide real estate investors considerable relief from taxes. With this deduction, you can claim half of what’s paid in self-employment tax as an income tax deduction. For example, a $2,000 of self-employment taxes = a $1,000 reduction in taxable income.
- Note: You can also get more self-employed deals when you deduct home office expenses and other business costs. Expenditures like travel expenses, payroll for other employees, utilities, and more can be written off for an office exclusively used for your business.
2. Cost Segregation on Rental Property
An excellent tax break for investors, this potential savings opportunity breaks down specific components of a real estate asset into shorter depreciation periods, providing more tax savings.
While the standard depreciation rate for a residential property is 27.5 years, up to 40% of a building’s components depreciate more quickly, such as electrical wiring, flooring, roofs, and appliances. By accelerating the depreciation into smaller 5, 7, and 15-year intervals, investors can claim more depreciation than the standard 27.5 years.
- Note: For accurate filing while figuring in cost segregation, it’s highly advised to get a professional to identify what components of your rental are eligible.
3. Passive Activity Losses/ Passive Loss
Like any venture that involves some risk, real estate investment isn’t a guaranteed succession of wins and gains. Sometimes, losses occur, and it’s important to write off these numbers. With passive activity losses, investors can write off losses from real estate that they don’t actively manage against other non-passive income.
- Note: Limitations apply to this deduction. For example, your modified adjusted gross income must be under $100k to get the full benefit and entirely phases out when your AGI exceeds $150k. Consult a tax professional to get the maximum benefit without violating any IRS rules.
4. 1031 Exchanges
If you want to avoid capital gains taxes, A 1031 exchange is a significant tax break that can make it happen. When you exchange a like property for another “like” property, you can avoid paying taxes on the sale. The IRS put more limitations on it recently, so check out the rules with a tax advisor before you try deferring your taxes in this way.
5. Low-Income Housing Tax Credit (LIHTC)
If some of your investments classify as low-income housing, you may qualify for the LIHTC, which offsets the cost of owning and managing these properties. The Tax Reform Act of 1986 created this incentive to create more affordable housing in the United States. There are strict guidelines to qualify, but property owners who get this credit can get extra tax breaks.
6. Memberships & Subscriptions
Many first-time investors can miss this extra tax break. Often counted as part of business expenses, these costs can go unnoticed because they seem minor. But every dollar adds up. If the following are exclusively used to run your real estate business, then these subscriptions and memberships can be part of office or business expenses.
- Customer management/lead generation software.
- Financial software memberships.
- Professional organization memberships.
- Social media tools.
- Stock photo memberships like Adobe and Shutterstock (these add up!)
- Cloud storage subscriptions.
- Other apps to manage productivity for your real estate business.
When you write off these expenses, keep accurate records of payments. Also, be sure not to write off any app used for personal reasons, like a Fitbit app, because that can’t be 100% proven to benefit your business. By simply being honest, you’ll do just fine.
If you rely on other trades and services to keep your investment ventures active, then talk to your tax pro about how much of these expenses you can write off. Whether you hire a property manager, local general contractors for renovations, or even your teens as extra hands for yard work, every dollar can add up to decrease your taxable income!
Don’t Miss These Real Estate Tax Breaks!
These are just some of the tax write-offs real estate investors often miss out on when filing yearly taxes. To ensure you’re fully up-to-date on current regulations, consult with an experienced professional. The more you do it, the more you can maximize your tax refund. Marketplace Homes is also here to help you find the right investment property for your needs!
Alicia Persson is a real estate content/SEO writer at Marketplace Homes. She has several years of experience working in real estate teams that specialized in investments and property management. Before she joined Marketplace, she was a freelance writer for 7 years, leading to a specialization in real estate and home living content for boutique digital marketing agencies. During her writing years, she learned the basics of SEO and gained experience writing for many different clients, making her highly versatile at creating diverse content.
She is a proud University of Virginia master’s graduate and enjoyed her undergraduate years at the University of Mary Washington. When Alicia is not writing, she plays keytar and sings in a local 90’s rock cover band, or she spends time with her amazing family.