Last week a new real estate investor client asked me to elaborate on what he can deduct. I so appreciated his desire to be thorough and minimize his tax bill that I put this together for him.
Real Estate Investor – Deductions
A deduction is a terrible thing to waste! As you consider the question “What can I (legally) deduct as a real estate investor?” it’s important to not limit yourself to some list of expenses. Lists can be very helpful, but no list can cover it all and it’s not being on a list that makes an expense legally deductible. Think about expenses incurred broadly in the context of what you do to make a living. In other words, there may be expenses you incurred that are deductible for you as a real estate investor that would not be deductible to a doctor or restaurateur, and vice versa. For example, as a real estate investor you could deduct the cost of a seminar on financing real estate deals, but the doctor couldn’t. Likewise that appendectomy refresher course you took last month is not a deduction for you. The technical language for a legally deductible business expense from the tax code centers on the words “ordinary and necessary”. To simplify things a little, you can consider if the expense is reasonable in the context of what you do professionally. Does it directly or indirectly help you make money in your business?
Here’s a list to help get you started.
- Advertising
- Auto – track miles scoping for deals, seeing attorneys, contractors, realtors, CPA’s, trips to Home Depot, visiting your properties, etc.
- Insurance
- Property Taxes
- Legal and professional fees
- Mortgage interest
- Repairs
- Supplies
- Utilities
- Management
- Commissions
- Cleaning & maintenance
- Landscaping
- Depreciation
- Training
- Travel
- Dues
- Marketing expenses – costs to rent, to sell, find investors, etc.
- Home Office (special rules apply)
- Computer and other equipment (special rules apply for computers and other items that are often used for personal entertainment purposes).
Other Comments:
Receipts – Not fun to keep, but here are a few tips:
- I recommend keeping all receipts $25 or greater. This is going to be actually more than the IRS normally requires, however in my experience during an audit, when a taxpayer has these kinds of details at their fingertips, it encourages the agent to pack up his/her bag sooner as the agent will expect the taxpayer can certainly substantiate larger deductions if they were detailed enough to substantiate the smaller ones.
- For receipts that are $75 or more write down on the receipt some details including as applicable: who & business relationship, why (business purpose), where and how much (if not clearly visible on the receipt).
- Try and run all your business expenses out of separate (business use only) checking accounts and credit cards. By doing this, you’ve captured almost all your potential deductions in just a few cookie jars.
- You can simply put the actual receipts in big envelopes for each year. If you hate hanging on to the paper, then you can scan them or even take pictures of them with your phone. As with all data, be sure you back up.
Tracking Auto mileage – also not fun. Here are a few tips:
- Similar to receipts, having a mileage log lets IRS agents know are have what is needed to substantiate your deductions and encourages them to pull-up their tent stakes.
- There are some pretty good mileage log apps that take some of the drudgery out of it.
- For old school types, you can get mileage log books at most office supply stores. These can be kept in the glove box or passenger seat with a pen of your car.
- Good practice requires the date, the beginning and ending odometer #’s, where you drove to and the related business purpose to be recorded in your log.
- If your business mileage is consistent throughout the year, you actually do not have to track your miles all year long. If you have several months of detailed mileage log entries, it is acceptable substantiation for annual mileage.
- If you have no mileage log, an agent can throw out all auto expenses deducted no matter how reasonable.
I hope this helps you keep a little more of your money in your pocket. Happy Holidays!