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Real Estate Investors: The IRS is Your Friend

For real estate investors, the IRS is a good friend and allows you to write off any losses you incur. Plus, there's mortgage interest deduction, where you can reduce your income by the amount of interest you pay. Yes, it's true, the IRS is kind to real estate investors, believe it or not. So, if you own an investment property, when you are doing your taxes, check and make sure you're using the correct deductions.

The government also allows real estate owners to write off depreciation of a property if you materially participate in managing the income property. You divide the property structure value, excluding the land, by 27.5 years. For commercial property the time frame is 39.5 years. Then there are also lengths of depreciation for appliances, apartment features, and landscaping areas.

Basically, if you own a rental property, almost any expense related to it is fair game for a tax deduction. All you need to do is look at IRS Schedule E (this is where you report all rental income and expense) of IRS Form 8825, and you will see what exactly is tax deductible.

  • Advertising
  • Auto and travel
  • Repairs
  • Supplies
  • Depreciation
  • Taxes
  • Utilities
  • Maintenance and other cleaning
  • Insurance
  • Commissions
  • Legal and other professional fees
  • Management fees
  • Mortgage interest and other loan interest

In addition to those deductions, there are yet more deductible expenses if you own an investment property:

  • Private mortgage insurance (PMI)
  • Condo fees
  • Land
  • Snow removal
  • Trash removal
  • The property’s purchase price
  • Down payments
  • Property improvements and landscaping
  • Amortization
  • Employee paychecks

Also, a 1031 exchange allows you to sell a property and not pay capital gains taxes on the sale if you buy another property of a like kind.

Qualify for a principal residence sale exemption up to $250,000 ($500,000 for couple filing join tax return) if you own and live in the property at least 24 months of the last 60 months before its sale. The 24 month occupancy doesn’t have to be continuous and can be broken up by periods of renting the property.

If you’ve acquired the property as a rental in a 1031 exchange then you’ll need to own the property for sixty months, if you want to earn the exemption. You’ll also have to meet the 24 month occupancy test.

But you’ll always want to consult your tax adviser for more specific details. There will be a lot to consider that he/she will be able to outline, and many of these details will be specific to your situation.

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