The long-term goal for buying an investment property is to build equity and value over and above the initial investment of the property. In the interim, it is generally to provide the investor with yearly tax advantages while waiting for a long-term payoff. With that in mind, it is important to use every deduction available to you. It can be easy to overlook items you can use.
Did you buy or sell property in the current year, or are you anticipating transactions in the upcoming year? Make a copy of your closing papers for your tax person to review for important deductions. Otherwise, you may miss some very important items such as those listed below.
- Amortization of points and other loan costs on investment loans
- Fees paid for a new mortgage or refinance
- Exchange fees for 1031 exchanges of your properties
- Insurance, taxes, interest and utilities paid during escrow
The following are deductions to track every year so a good practice is to keep accurate records monthly.
- Mortgage interest
- Homeowner association dues
- Property taxes and insurance
- Professional fees – management, attorney, accountant, etc.
- All property management costs – management fees, leasing or other fees
- Advertising expense for vacancies
- Utility payments
- Miscellaneous repairs
- Added or replaced appliances
- Replaced or upgraded units, such as heating and air
- Bank maintenance, late charges and service fees
- Travel expenses incurred because of your investment
Sometimes you need to amortize certain deductions over a period of years. It is best to see the advice of a tax professional on items such as those listed below.
- New paint, carpet, fencing, gutters, roof, and other major improvement
- A major loss to the property
Often the rental market dictates using incentives to lure tenants into properties. Did you have any this year? You could also be contemplating them for next year to offset vacancy losses. These expenditures are also deductible. Here are some examples.
- Cable/satellite installation
- Free memberships in a local establishment
- Gifts, such as a free Thanksgiving turkey, ham, etc.
- Tenant insurance paid by the owner
- One month of water, sewer, and garbage, if applicable
There are probably more items to consider. Review your expenditures carefully for any missed deductions; be sure to consult and question your tax person on what items you may be able to use or ones missed. You want to use every expense possible but at the same time, you want to show the Internal Revenue Service reasonable and valid deductions.
It is certainly not too late to plan for the next tax year and now is a great time to think about organizing for this one. Make your investment portfolio work for you.