Do you own a house, apartment, or commercial property that you rent out? Want the best property management companies in Philadelphia? While real estate provides capital growth and regular income, your investment property includes several tax deductions you can benefit from. Let's take a look.
Passive Real Estate Investor or Professional?
Do you invest in real estate full- or part-time? Real estate professionals are those who spend 50% of their time (over 750 hours annually) on their rental businesses. These might include construction, management, development, and acquisitions.
If you're a passive real estate investor or a pro, how you file your taxes can determine the types of tax advantages that are available to you. As an example, if you invest in real estate full-time, any losses you have are fully deductible. This includes insurance, local taxes, repairs, mortgage interest, and landscaping.
If, on the other hand, you're a passive real estate investor, your deductions are limited to $25,000 from your rental income. It's also phased out if your income (MAGI) is $100,000-$150,000. It's helpful to know that losses that exceed $25,000 can carry over into the next tax year.
Types of Income
When it comes to real estate income, there are different sources. These include your rental income, repairs, improvements, expenses renters pay, and security deposits (in some instances).
Rental income and advanced payments are taxable. Treat these like income. As an example, if you rent a home for $2,000/month and tenants pay first and last months' rent, that's $4,000 you're collecting. This is taxable income even though the latter portion is for a future date. With renter-related expenses, any types of emergency repairs fall into this category and are considered income. If a tenant makes an emergency repair, you can deduct this as a rental expense.
Some real estate investors let tenants barter their services. This is an exchange where they might perform house repairs in lieu of paying a portion of their rent. Let's say you agree to $500 for their plumbing services and deduct that from their rent. The $500 is taxable income you can deduct as an expense.
A security deposit isn't taxable income unless it's for repairs you have to make when a difficult renter leaves. If you charge a $1,000 deposit and there are $800 in repairs, the $800 is a deductible expense. With improvements and repairs, the IRS defines these differently so not everything is a deductible expense.
Repairs (painting, fixing a roof leak, plumbing) are deductible expenses. However, improvements (a new patio, garage, or roof) that add value aren't deductible expenses. Additionally, items like your mortgage fee or an appraisal are not considered deductible expenses.
Types of Deductions
Whether you're a passive investor or a professional, there are different deductions you might benefit from. These include mortgage expenses, travel-related expenses, and certain fees and losses.
Your mortgage includes fees (appraisal, commission) that are not deductible. Additionally, mortgage payments aren't fully deductible as a portion pays principal and a portion goes toward interest which you can deduct. Check your Form 1098 to see how much interest you pay annually so you can include this deduction. Report mortgage interest on a 1040 Schedule A. However, if it's for your rental property as a deduction, use Schedule E instead.
With travel expenses, do you have to pick up rent or travel to make repairs or improvements? These are deductions. But, the latter falls under the improvement and depreciation category. Consider using the standard mileage rate or list your actual mileage expenses. You can find information on these topics in Publication 463.
Additionally, there are a few other expenses you can deduct. These include landscaping (lawn care), your insurance, tax prep fees, and taxes. You may also be able to deduct expenses for hiring the best property management companies in Philadelphia. Other expenses you can deduct include thefts or losses from severe weather (storms, earthquakes, floods, tornadoes).
When it comes to co-ops and condos, there are special rules on these types of deductions. For condos, assessments, repairs, interest, depreciation, taxes, and dues are deductible. Improvements are not deductible. Depreciate these based on the life expectancy of the improvement.
With co-ops, it's a similar breakdown except when it comes to improvements. Expenses like monthly maintenance are deductible. But, in this case, improvements are neither a deduction nor a depreciation. The improvement is added to the cost bases in the co-op's stock. Hence, it's a way to reduce capital gains when you're ready to sell your co-op.
Find the Best Property Management Companies in Philadelphia
Whether you're a passive investor or professional, various types of deductions can help lower your tax liability. Hence, it's best to keep accurate records, any supporting documentation (logs, emails), and all your repair receipts. If you need assistance at tax time, the best property management companies in Philadelphia can help. Download our free Guide to Finding the Best Philadelphia Property Management Company. This can help ensure seamless and accurate filings annually on all your properties!