Tax Deductions

Tax Deductions – Tax Write-Offs - Income Property

For those of you who are new to real estate investment, it is important to have a good understanding of the following tax deductions ( tax write-offs) associated with income producing properties All Operating Expenses incurred via the operation and maintenance of an income producing property are tax deductible. They include such things as accounting fees, advertising costs, legal fees, insurance premiums, janitorial service, lawn maintenance service, leasing commissions, license fees, office supplies and expenses, pest control, property management fees, property taxes, repair costs, salary and wages, snow removal service, misc. supplies, telephone, trash removal, vehicle mileage expenses, utilities, etc. All Mortgage Interest paid on any loan or loans secured by income property is tax deductible. All Points paid on any mortgage or loan secured by an income producing property are deductible over the life of the loan. 

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For example, if you obtain a $100,000 loan with a 20 year term and you pay 1 point to obtain the loan, you can write-off $50 a year over the 20 year period for a total of $1,000. If you sell the income property and pay off the balance of the mortgage early, you can deduct all unused points in that year. Miscellaneous Closing Costs connected with obtaining a loan for an income producing property such as mortgage insurance premiums, fees for an appraisal required by a lender, title search fees, loan origination fees, recording fees and abstract fees are deductible over the life of the mortgage.

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Depreciation is the loss in value of an asset or building over time due to wear and tear, physical deterioration and age. The IRS allows you to depreciate income producing properties over their useful life which is determined by law. Current law stipulates that residential income properties must be depreciated over 27.5 years and commercial income properties over 39 years. 

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For example, you purchase a warehouse for $900.000 in January. The land where the warehouse resides is valued at $120,000. The building is valued at $780,000. Commercial property is depreciated by equal amounts annually over the 39 year period. Since you purchased the income property in January, the IRS rules allow you to write-off 11 1/2 months of depreciation in the first year or $19,167, 1/2 month of depreciation for January and 11 full months of depreciation for the remainder of the year. For the next 38 years you would deduct $20,000 a year and in the 40th year, the final year, you would write-off the remaining 1/2 month of depreciation , $833.

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Capital Improvements are subject to the same depreciation method as the building above. Capital improvements include a new roof, new siding, a new addition to a building, etc. Capital improvements to a residential income property are depreciated over a 27.5 year period. Capital improvements to a commercial income property are depreciated over 39 years. Improvements to land such as a retaining wall can be depreciated over a 15 year period. Personal Property includes such items as furniture, appliances, lawn mowers, snow removal equipment, etc. which are not permanently attached to the land. Depending on the type of property, a recovery period of 3, 5, 7, or 10 should be used. Check with your accountant to determine the appropriate recovery period for a specific type of personal property.

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All Operating Expenses incurred via the operation and maintenance of an income producing property are tax deductible. They include such things as accounting fees, advertising costs, legal fees, insurance premiums, janitorial service, lawn maintenance service, leasing commissions, license fees, office supplies and expenses, pest control, property management fees, property taxes, repair costs, salary and wages, snow removal service, misc. supplies, telephone, trash removal, vehicle mileage expenses, utilities, etc.

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All Mortgage Interest paid on any loan or loans secured by income property is tax deductible. All Points paid on any mortgage or loan secured by an income producing property are deductible over the life of the loan. For example, if you obtain a $100,000 loan with a 20 year term and you pay 1 point to obtain the loan, you can write-off $50 a year over the 20 year period for a total of $1,000. If you sell the income property and pay off the balance of the mortgage early, you can deduct all unused points in that year. Miscellaneous Closing Costs connected with obtaining a loan for an income producing property such as mortgage insurance premiums, fees for an appraisal required by a lender, title search fees, loan origination fees, recording fees and abstract fees are deductible over the life of the mortgage.

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