Top 10 Tax Write Offs for Rental Property: 2023 Deductions

top tax write-offs for rental property let's  get into it now this video is focused purely   on real estate okay so i assume that you are  either one a current real estate investor   or two you are seriously considering becoming  a real estate investor by owning your own   single-family property or maybe getting into a  real estate syndication by investing with another   group of people so i personally love real estate  and i'm in a few real estate syndications and i   have done taxes for hundreds of real estate  investors and real estate can be a great way   to build long-term wealth earn additional income  and generate a tax shelter and because of that in   this video i'm going to break down the top  tax write-offs for rental property in 2021   and i'm going to give you some deductions and some  write-offs that no one else is talking about and   if they are i promise to break it down in a more  simple way that everyone can understand stay tuned hey i'm sean with life accounting the accounting  company that saves people from high taxes   and low profits as always if you find any  value from this video even a nc whitney bit   please hit that like button for youtube  algorithm so other people like you   can learn more about tax write-offs for rental  properties and while you're at it subscribe if   you want to learn more about how to reduce your  taxes and maximize your profits now before we   get started i just want to clarify that you  may hear me use the phrase tax deductions   and tax write-offs interchangeably in this  video and maybe even in other videos as well   and guys it's basically the same thing all right  tomato tomato okay at the end of the day what   we're trying to accomplish is to make sure that  we're using all the legal ways to reduce our   taxable income that we report to the irs hey sean  look it's the irs all right so when it comes to   tax write-offs for rental properties you need to  know the difference between getting tax deductions   as an active real estate investor and a passive  real estate investor because the irs treats   passive income and active income differently for  tax purposes alright so let's go ahead and dive   a little bit deeper into this so number one what  is passive income from real estate so in general   real estate investments are considered to be  passive income because revenue is generated from   money that you invested usually how it works is  you go out and you get a loan which you use your   own money to put down a down payment and then you  use that loan to get a rental property and then   find a tenant that will pay you every month so  basically without the money you likely would not   have been able to acquire the rental property so  it's treated as passive income even guys if you're   actively maintaining the property on the other  hand money that you trade your time for like a job   is considered to be active income and remember  that because it's going to come full circle here   in just a second all right let's talk about number  two what is active income from real estate so the   irs considers someone who works 750 hours per  year in the real estate industry as an active   real estate professional and i did the math  okay and 750 hours is about 20 weeks at 40 hours   per week so basically you need to work about half  a year to be considered a real estate professional   for tax purposes also if you're a full-time  developer or you're a full-time real estate agent   that is paid on commissions only then you are  also considered to be a qualified real estate   professional okay so why is this important why  would someone want to be an active real estate   investor instead of a passive real estate investor  well because these tax write-offs that i'm going   to share with you today have the potential to  drive a loss on your property even if you have   positive cash flow which allows you to reduce your  tax liability to zero or even negative okay so   here's the catch if you're getting passive income  and that you generate a passive loss from all the   tax write-offs that i'm gonna share with you today  then that can only be applied to your passive   income if you're a passive real estate investor  for example if you make a thousand dollars of   passive income and then you have a passive loss  of two thousand dollars then your net passive   income will be zero which will still be a great  thing because you don't pay anything in taxes and   you can carry that loss to the next year so you  won't lose well your loss all right however if you   are an active real estate professional then you  can apply your active real estate income against   your rental property loss so yes real estate  investors and professionals live the tax dream   losses what are those all right so there is  one exception which leads us to our first   tax deduction for real estate investors so if  you are making 100 000 or less you can still   write off 25 000 a year in your passive rental  real estate losses to be applied to any active   income that you have and if your income goes  above 100 000 then the deduction goes down by   50 cents for every dollar of income until  it eventually phases out at about 150 000   a year and that 25 000 deduction is enough to put  you in a lower tax bracket so that's definitely   some huge tax savings all right so tax write-off  for rental properties number two the 1031 exchange   currently the law allows investors to defer paying  real estate gains if they reinvest the proceeds of   the property within six months of the sale so  in theory what you can do is sell a real estate   property at a gain then reinvest all the profits  to buy a new home at greater value and then avoid   paying any capital gains taxes and when you die  you could even pass the property on to your heirs   completely tax-free now at the time of making  this video there is a proposal coming out from the   president to remove the 1031 exchange for people  who have real estate profits of more than 500 000   and they want to ensure that tax loophole  will be closed by taxing capital gains   on inherited assets as well now whether this  proposal is approved or not is left to be seen   but if you want to learn more about capital gains  taxes then i'll link a video up above and in the   description below that breaks it all down all  right tax write-off number three repairs okay   warning warning warning if you  already know about this deduction   then take a couple minutes to listen to this  because i promise you it's going to be worth   it so in general yes you can write off things like  fixing a garbage disposal or patching holes up in   a wall for your rental property but people often  misclassify their repair costs on their tax return   which can be a red flag for the irs if you ever go  through any kind of audit for example if you buy a   house for let's say a hundred thousand dollars  and then you spend thirty thousand to renovate   the kitchen you may not deduct that full thirty  thousand dollars that year that's because the   irs will view that as a capital improvement and  viewing that you bought that house instead of four   hundred thousand dollars for a hundred and thirty  thousand dollars so my general rule of thumb is   that if you're paying a really high amount for any  type of repair or maintenance cost that you see   then make sure it's not viewed as a capital  improvement that improves the value of the overall   house because again that can trigger an audit  now according to the irs publication 527 here are   some things that should be capitalized bedroom  additions landscaping and sprinkling systems   storm windows new roofs installed security systems  heating and ac systems water heaters new flooring   and insulations all right it goes even deeper  than that but those are the main things that   you need to be aware of all right now let's go to  move into tax write-off number four legal fees i   want to bring this up early on because a lot of  people avoid getting into real estate because   of this very reason right they fear the eviction  process or they fear that somebody will sue them   in their rental property so if this is you  you should know that any legal fees that are   associated with stuff like evictions or defending  yourself in court or even just writing up   a strong lease agreement all these expenses can be  used as a tax write-offs so at the very least you   can likely preserve your capital investment if you  do run into legal issues all right tax write-off   for rental properties number five depreciation  now most of our tax write-offs require that you   actively spend money or cash flow from your  property but depreciation is different it's   one of the few deductions that can put you in  a loss while keeping you in positive cash flow   usually people think about their home as  an investment that appreciates over time   but as a rental property is treated more like  a business asset which depreciates over time   and most business assets eventually reach a  point where the asset is no longer in a useful   life span because real estate investors need to  continue to attract high quality tenants and keep   up with the rental rates in the area that they may  need to improve certain aspects of their home like   the floors or the paint etc and because of that  you can take a depreciation deduction every single   year now it is important to know that you must  have a property for at least a year to qualify   for depreciation and as a bonus tip you need to  know about depreciation recapture so if you sell a   property for more than depreciated value then the  irs may hand you a 25 recapture tax for example if   you bought a house for a hundred thousand dollars  and it appreciates the 150 000 then you may have   to pay a 25 tax on that 50 000 gain all right  sometimes this tax can happen even if you don't   claim depreciation so it's best to take advantage  of depreciation every single year on your rental   property that you can alright tax write-off  number six mortgage interest okay so most people   will have a loan that charges them interest on  their rental property and i've seen a lot of real   estate sheets analyzing cash flow but you should  know that mortgage interest can be deducted 100   from all your rental income so basically if you  think about it you're kind of getting a loan   tax free as long as you can put a tenant in  there that can pay you every single month on time   and usually around january or february you're  gonna get a form 1098 from your lender that shows   you exactly how much interest you paid and all you  have to do is add that to your schedule e which is   the residential tax form for rental property  owners all right tax write-off number seven   property taxes now this is one i've seen people  frequently overlook when it comes to deductions   i constantly have to remind people to give me  their property tax payments for their last tax   year and this is a tax write-off that actually  applies to personal property commercial property   and of course rental properties so this is one you  got to remember to take every single year if you   own any real estate but i do have to mention there  is a limit on property tax deductions for personal   use which extends up to ten thousand dollars  if you're married filing jointly now this limit   does not apply to active businesses like rental  properties for example all right moving on to   tax write-off for rental properties number eight  wages for employees and independent contractors   so if you hire a property manager or a maintenance  man you can deduct their wages on your schedule e   against your passive real estate income all right  this will also apply to independent contractors   like electricians lawn care companies or even  carpenters of course if your plans are to build   a big real estate company then you can deduct  the wages of your employees like if you hired an   asset manager or a real estate agent as well all  right moving along the tax write-off number nine   the home office deduction if you have a space  in your home where you're conducting any type   of rental business conversations or work which i  assume that everyone does then you definitely need   to take advantage of the home office deduction  now i won't dive deep into this because crystal   did a video recently completely dedicated to the  home office deduction which i'll link up above   and in the description below but if you want to  quickly find out how to use and calculate your   home office deduction here's what you can do  number one calculate your office space square   footage and then divide that by the entire square  footage of your house or two use the prescribed   rate multiplied by the allowable square footage  used in the home and for 2020 the prescribed rate   is five dollars per square footage of a maximum of  300 square feet so for example if your home office   measures at 150 square feet then your deduction  would be 750 dollars which is that 150 times five   and remember the space must be used for rental or  other related business activities all right tax   write-off number 10 capital gains exclusions the  last write-off i want to touch on is the capital   gains tax exclusion some of you may know that  the capital gains tax rate is going up for people   that make more than one million dollars per year  which is only like point zero three percent of   the population so the capital gains exclusion  basically applies to mostly everyone so as long   as you live in your house for two of the last five  years then you can sell your primary residence   for up to 250 000 more if you're single than what  you bought it for and if you're married you can   sell your primary residence up to five hundred  thousand dollars more than what you bought it   for completely tax free that is more specifically  capital gains tax-free okay so if you're one of   those people who are interested in house hacking  or house flipping by moving into a property   renovating it yourself and then selling it later  then this would be a great approach and a great   strategy for you to build your wealth with real  estate okay now if you want to learn more about   capital gains taxes and my personal opinion on how  the new proposal that is coming up may impact you   then make sure you watch my capital gains tax  video coming up next and as always thank you so   so much for watching subscribe like and keep  on learning and i'll be along with you you

Channel: LYFE Accounting

Views: 164,696

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Id: O8GXWMGyqcE

Length: 15min 28sec (928 seconds)

Published: Fri May 07 2021