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By Michele Lerner
As 2009 draws to a close and most people’s minds turns to frivolous holiday joy, financially savvy investors make sure they are ready for everyone’s least favorite activity: paying taxes.
Real estate investors with years of experience may think they know all there is to know about what they can and cannot deduct in terms of property expenses, but IRS rules change. Missing out on a potential deduction can cost an investor significant profits.
For example, did you know that Private Mortgage Insurance (PMI) premiums on a rental property are deductible? According to www.IRS.gov, PMI can be deducted on line 9 of Form 1040, Schedule E as a Supplemental Income and Loss.
If you purchased a rental property in 2009 and want to deduct your closing costs, you should carefully review the IRS website and IRS publications to be sure you are following the rules. The only deductible closing costs for those for interest and deductible real estate taxes.
The following list of settlement fees and closing costs for buying the property are additions to your basis for the property and part of your depreciation deduction:
- Abstract fees
- Charges for installing utility services
- Legal fees
- Recording fees
- Surveys
- Transfer taxes
- Title insurance
- Any amount the seller owes that you agree to pay (such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs and sales commissions)
Be sure to keep every paper related to the purchase of a property because these figures will be needed for future tax purposes, particularly when you sell the property.
The following IRS Publications provide information for homeowners, including investors, about what they can and cannot deduct on their income taxes:
530 Tax Information for Homeowners
523 Selling Your Home
527 Residential Rental Property
535 Business Expenses
936 Home Mortgage Interest Deductions
946 How to Depreciate Property
Michele Lerner, a real estate expert and freelance writer with 20 years of experience, is the author of “HOMEBUYING: Tough Times, First Time, Any Time”.
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