Investing in real estate offers a boatload of tax deductions. Even in years when you don't spend any money on the property, you can still claim deductions that reduce your taxable real-estate income. If you have a loss, you may be able to write it off against your non-real-estate income.
Maintenance and repairs on an investment property are completely deductible. Whether you're treating the walls for mold, fixing leaks or patching the roof, you write off the costs on your taxes. Don't confuse maintenance with improvements, which you have to depreciate over several years. Improvements are projects that add to the value of the building. Putting a new part in a defective air conditioner is is a deductible repair; installing a new, more efficient cooling system is an improvement.
Depreciation represents the loss to your investment through age and wear and tear. You deduct depreciation on the value of the building -- not the land -- and on improvements you make. For a rental property, you depreciate the original purchase price over 27.5 years or 40 years, depending on which depreciation system you choose. The write-off for furniture and appliances in the rental takes place over five or nine years. Each year you calculate how much the value has depreciated and report the loss.
You have to depreciate the original purchase price, but interest on the mortgage is a deduction: If you pay $3,500 in interest this year, for instance, you get to write it off. Your property taxes are a business expense, as are legal, insurance and management expenses you pay for the property. If you travel to your rental house or office building on business, that's deductible too, whether you fly there or just drive a few blocks.
You can always deduct real-estate expenses from real-estate profits. If you're a real-estate professional -- the IRS spells out the qualifications in Publication 527 -- and your investments ran in the red this year, you can deduct the loss from other income as well. If you're not a pro but you manage the property -- vetting tenants or advertising vacancies, for instance -- you can write off up to $25,000 from other income. When you turn over the job to a management company, you have to carry over the red ink to next year and claim it then.
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