Real estate is a rewarding investment that helps buyers diversify their portfolios and accumulate wealth. However, as with most major purchases and investments, real estate comes with its share of taxes. The IRS provides opportunities to deduct various business expenses to help minimize your tax burden. Here are six ways to lower your taxes as a real estate investor.
Using a vehicle for business purposes allows investors to deduct taxes based on the distance traveled at a rate of 56 cents per mile. The entire ownership and operation of the vehicle are deductible if the investor exclusively uses the car for business reasons. If the car is also used in a personal capacity, only business trips are deductible. Real estate investors who travel between offices and real estate properties can deduct the cost required for traveling between these locations, but not the cost of personal errands.
Offices & Supplies
Investors can deduct utility expenses incurred at their office properties, such as heat, water, and electricity. However, as with vehicle usage, personal utilities are not deductible. This can be difficult for those working from home. The IRS allows home office deductions, as long as that office is regularly and exclusively used for business purposes. Here are some guidelines to determine eligibility:
- The IRS defines “home” as a house, apartment, boat, or similar residence. This includes free-standing structures and exterior buildings like garages and barns.
- A portion of the home must be used exclusively for business, such as an extra room that functions as an office.
In addition to business and home office utilities, investors can deduct supplies and materials purchased during the tax year as long as those supplies are used within that year.
Real estate often requires the assistance of legal and financial guidance from lawyers and accountants. The fees incurred from these professional services are considered deductible if it’s for business operations. However, there are some exceptions; payments of a personal nature, like damages from personal injuries, do not qualify as business expenses.
In many cases, real estate insurance is considered a deductible business expense. For example, liability insurance is essential as a real estate investor, as it protects you in the event someone on your property is injured. Investors should also consider disaster-related insurance to cover losses due to fires, storms, and more.
Health insurance for those who are self-employed is also deductible. This includes insurance for spouses and dependents. To qualify, investors must be self-employed with a net profit for the previous year or have a partner who is also self-employed with net earnings.
Investors may consider advertising if they want to rent their available properties for residential or commercial purposes. All advertising efforts must relate directly to obtaining residents for these available properties to be considered deductible expenses. This could even include paying for meals if the purpose is for advertising a business or property.
Charitable contributions are a great way to give back to your community while lowering your taxes. If the charitable contribution benefits your business in some way, such as donating to an event in town that will increase public awareness of your real estate properties, that payment is deductible. You can also use charitable contributions to reduce your capital gain tax liability. Donating long-term appreciated assets, like real estate, is an excellent strategy to help you minimize capital gains taxes.
A lot of time and money goes into managing real estate properties. As an investor, it’s important to note possible deductions that you may qualify for to make the most out of your finances. Contact one of our tax professionals and get help determining deductible expenses to lower your tax burden.