We are all well aware that tax season is upon us, so it’s time to get ourselves organized and informed. We have all the major dates marked on our calendars, and we’ve reviewed an updated tax guide for 2019.
So what’s next? You need to understand exactly which deductions you can claim this year on your tax return.At Stessa, we’ve teamed together with the experts over at The Real Estate CPA to discuss the top tax advice real estate investors ask us related to tax deductions for their businesses.
Here are the top 7 tax questions we mostly hear about business deductions. This will help you prepare for tax time, and ultimately keep more of your hard-earned income.
Are meal costs incurred while traveling to/from my rental properties fully deductible?
Any meals incurred within your tax home (a 40-mile radius of your city or general geographic area) are not tax deductible if you eat alone. If you go out to eat with a business partner, vendor, real estate agent, attorney, etc., then 50% of the meal is tax deductible.
You can also deduct 50% of your meals when you eat alone if you’re traveling outside of your tax home and you already own properties in the destination geography. If you’re merely scouting for new acquisitions, these expenses are not deductible until you make a purchase in the new market.
What are the three most commonly overlooked or missed deductions for rental property owners?
Home Office Deduction – Many rental property owners miss the home office deduction for one reason or another. You are required to follow specific guidelines to properly claim this deduction but the tax savings can add up over time, particularly if you live in an expensive housing market.
Travel Deductions – Many real estate investors miss the mileage deduction because they forget to track the local miles they travel for business trips to the bank, meetings with investors and vendors, and properties. The MileIQ mobile app is a great tool for tracking miles automatically, which can then be easily logged in Stessa. Some owners also fail to deduct long-distance travel expenses (i.e. airfare, lodging, etc.) incurred to travel to their out of state rentals or educational events.
Depreciation – Many rental property owners fail to report a depreciation expense on their tax return at all, while others owners are too conservative in the way they allocate their property’s value between land and improvements. This causes some investors to leave a significant amount of depreciation deduction on the table during each year of ownership.
Are rental property owners generally better off using the IRS standard mileage rate or “actual expense” method for auto use?
While the “actual expense” method can sometimes yield a higher deduction, most rental property owners should use the standard mileage rate approach because it’s far less burdensome from a record keeping perspective.
It’s also relatively easy to track with MileIQ and Stessa. The additional hours required to pursue the “actual expense” method generally outweigh the benefits, especially when you consider the high relative value of the average rental property owner’s time.
How do I handle portfolio-level expenses on my Schedule E? For example, airfare incurred while traveling to/from multiple properties.
These expenses are generally allocated across the relevant properties and then reported on Schedule E. For example, if you spent $200 in roundtrip airfare to visit 5 of your rental properties, you’ll allocate and deduct $40 on Schedule E for each of the 5 properties.
You also have the option of allocating portfolio expenses according to square footage or value (instead of evenly) if either is a closer approximation to reality.
Which non-loan closing costs are deductible in the year incurred and which must be capitalized?
Property taxes and insurance are the two main types of closing costs that are deductible in the current year.The following common closing costs are added to the acquisition basis of the property and depreciated over 27.5 years:
- Abstracts fees
- Title insurance
- Title search
- Government recording charges
- Legal fees
- State/city/local tax stamps
- Transfer taxes
- Appraisals not required by lender
- Utility installation fees
- Any amounts 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
Which loan costs are deductible in the year incurred and which must be capitalized?
Generally, interest paid on any loan or mortgage is deductible in the year incurred.Points, origination fees, credit reports, bank fees, fees for appraisals required by the lender, mortgage insurance, assumption fees (if any), and application fees, are capitalized and depreciated over the life of the loan (e.g. 30 years).
I’ve read that rental property owners must take depreciation expense deductions. I’ve also read that you get a credit for any missed past depreciation deductions against depreciation recapture when you sell. That makes it sound optional. What’s going on here?
As a rental property owner, you must take deductions for depreciation expense when available. The IRS automatically assumes you took the full deductions and you’ll be subject to depreciation recapture on the amount you could have taken during your period of ownership.
Bottom line: make sure you’re taking your full depreciation deductions. If you discover that you failed to take a depreciation expense in the past, it’s best to amend your prior returns or file an application for Change of Accounting Method to take advantage of the missed deductions in the current year.
While reasonable efforts were taken to furnish accurate and up-to-date information, we do not warrant that the information contained in and made available through this article is 100% accurate, complete, and error-free. We assume no liability or responsibility for any errors or omissions in this article.