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
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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