Welcome back, everyone.
Today, I'm going to talk to you
about the six best tax write offs for real estate investors.
Real estate is very unique in that you can get
a lot of deductions that you may not think are available
and actually offset most or all of your income.
Which makes it different than almost every other business.
Today, I'm going to talk about the six best ones
for real estate investors and how you can take advantage of them.
Today.
The first one is the mortgage interest deduction.
If you have a loan on your property, which the majority of real estate,
you do have a loan you're trying to use other people's money.
It's also very capital intensive.
Well, a portion of that monthly payment is actually deductible.
The interest portion and that is one of the largest write offs,
if not the biggest write off for a real estate investor.
So you really want to make sure that you're taking advantage of that.
So, for example, if you have a rental where your income is,
say, 20,000 and gross rents well, you're not going to pay tax on that for 20,000.
You can also deduct the interest expense.
So if your mortgage interest is 5000 for the entire year, for 12 months,
January through December, then that's 5000 off the gross rent you collected.
So that leaves you with 15,000 that you'd be taxed on
before we get into the rest of the deductions.
Because remember, our goal is even though we're cash flowing
to offset as much income as possible.
The second biggest deduction for real estate
investors is the property taxes.
You know, every state is going to have a different level of property taxes.
And some states, like maybe Texas, you may have higher property taxes
because they don't have an individ ual income tax.
So they have to make up their revenues in other ways.
Versus in Arizona, we may have lower property taxes than Texas
because we have an income tax here that makes up some of the revenue.
But this is another one that you want to pay attention to.
It may not be as big of a deduction as the mortgage interest expense,
but it makes a big difference.
So going back to our example
where we had a rental with 20,000 of gross rent
and we've already taken advantage of the mortgage interest deduction for 5000.
So before we take into account property taxes,
we're at a 15,000 taxable income.
Well, let's say now your property taxes are 2000.
Well, that would reduce our income further.
So now we go from the 15,000, we're at down to 13,000
and now we've reduced our income substantially
and now we're going to continue because we still have four or more
big deductions that you can take advantage of to try and get this down to zero.
The third deduction and this is a big one because, you know,
you just can't have a rental property without a repair coming up at some point.
It's just inevitable.
And there's all kinds of different repairs that can happen.
There's more capital intensive type repairs.
You know, maybe you're thinking of a remodel
or refreshing the property to keep it up to date or if you purchased
a new property, maybe it hasn't been touched since it was built.
And you really need to spruce it up to attract new renters
and get the rents up to where it is.
And I'll talk a little bit about those more capital intensive
projects versus more of the kind of day to day repairs,
which would be things like if the refrigerator goes out
and you need to replace that or maybe have a leaky faucet or something,
you know, those things that just kind of periodically come up.
They're really you're you're doing just to keep the property
in the condition where it can be used and rented
so a repair is something that's less capital intensive,
which means it's deductible when you actually incur it.
So typically
anything that is not
bettering the property in some way
is going to be classified as a repair
so like I said, the leaky faucets,
if you have to do some re
caulking around the bathroom and the tubs and where the water is,
if you need to do drywall repair, if you need to repaint the place,
all of those are more typical repairs that just have to be done
on on a somewhat regular basis and you are able to expense those.
Now, when you purchase assets that are used in the property, they're not
necessarily part of the real estate, but they are needed in order to rent it.
So on residential property,
you have your frigerator and your dishwashers and your stoves.
Maybe if you supply the washer and dryer, then you have those type of items.
Well, those are technically separate assets that absent exceptions
in the IRS code, you wouldn't be able to deduct in that year.
You'd have to depreciate over time.
And we talk about depreciation a lot in some of the other videos.
So reference those if you want more information.
But there is a special exception for property for personal property,
meaning it's not real estate, it's not a fix to the real estate.
You can move it around if it's less than 20
$500, then you can just write it off right away.
So if you have to purchase a new refrigerator
because the old one went out or maybe you're just upgrading it,
you can write that off right away.
So make sure that you're not depreciating
that because you're going to lose out on deductions.
And as we know with the current environment, prices are going up.
So the more we can deduct, the better.
So this is a big one so let's continue with that example that we had going.
And you know, on a typical home,
you depends on
the age how much you will spend on repairs,
but let's just say that's another thousand dollars on average,
but let's keep going because we still have three more deductions.
Our fourth big deduction is insurance expense.
If you have a rental, it's incredibly important to protect
the property and yourself with insurance.
So you want to make sure
that you have that on your properties and that you have enough coverage.
So talk to your insurance agents.
Make sure you're taking care of there because this is another expense
that every rental property is going to have
and you want to make sure that you're accounting for it
and deducting it appropriately and the type of insurance.
It really depends on your risk tolerance and everything.
So the the prices can vary widely,
but let's just say that that's another 1500
a year that you're spending on insurance to make sure that you're covered.
And it typically will cover the real property.
It'll cover some personal property, but
this typically is not going to cover your renter's property.
So you want to make sure that they have their own coverage.
And because that's an expense that they are incurring
that is something that would not be deductible to you. It's
just your insurance for the real property and personal property that you own.
So that if that's another 1500.
Just to recap on our example where we're at,
we have 20,000 gross rents.
We've taken off 5000 of mortgage interest,
we've taken off 2000 of property taxes, we have $1,000 in repairs,
and now we're adding another 1500 of insurance expense.
And that brings us down now to a net of 10,500.
So out of 20,000 of cash flow coming in, we've
now are only being taxed on 10,500
and we still have two more major deductions to go to try and get
this thing as close to zero as possible are 50 duction is management fees.
So you may be able to manage the property on your own to start
and maybe that's a great idea.
So you can learn more about how to take care of the rental
and the important things that when you have a property manager,
you know what they should be doing
and you can make sure you manage them appropriately.
So the idea though is that you want to, in real estate,
not only use other people's money, hence our mortgage interest deduction,
but you also want to leverage other people's time, hence management fees
so that someone can actually take care of the day to day finding your tenants,
leasing it up, taking care of scheduling repairs
and all the other day to day activities so that you can spend your time
looking for more investments and continue to grow.
And of course, because this is a regular business expense
that you're going to incur, this is another deduction typically li
your if you have single family homes or a smaller portfolio,
you could probably expect to pay 10% of your gross rent on management fees.
Of course, if with larger portfolios
say you have 20 units, you can typically start to get that lower
with a management company, maybe you'll pay 8%,
some of them going as low as 6%.
If it's commercial property because your leases are typically
a little bit longer, you could expect to pay more in the three
to 5% range depending on the type of property.
How many tenants things like that.
So in this example that we've been using, I'm going to say
that it's a residential property and we're at 10% of our gross rents.
So that's 10% of 20,000
would be $2,000 annually in management fees.
So now to recap where we're at as far as our taxable income
with these five deductions before we get to our last one,
which is a big one and arguably one of the most important ones,
we're going to start with our 20,000 of gross rent
less our 5000 of mortgage interest deductions.
Then we're going to subtract off our 2000 of property taxes,
we're going to take off a thousand of repairs,
we're going to take off 1500 of insurance expense.
And now when we add in our management fees we're down to 8500.
So now we're only being taxed on 80 $500,
even though our renter is paying us 20,000.
So it's very important to keep track of all of these,
make sure you have good records
so that at the end of the year, when you give them to your CPA,
they're able to include them in your tax return.
Our last deduction that we're going to talk about today
and the one that I like the most is depreciation.
And the reason that this is my favorite deduction
is because this isn't actually a true expense of the business.
It's just this freebie deduction that you get as a real estate investor.
And one of the reasons why real estate is the best business from a tax perspective.
So depreciation which we've talked about in other videos,
but just to recap is when you make a major purchase,
you don't write off that entire cost in the year.
You buy you take that deduction over a period of time.
So in this case, if this is a residential property, let's say it's a single family
home and you've bought it for 300,000, a portion of this is not depreciable
because it's part of the land or it doesn't go anywhere.
So you don't get a deduction for land
and let's say in this case, 20% is the land value,
the rest is the home that means of 300,000
240,000 is depreciable and residential property,
as you know from prior videos, is depreciated over 27 and a half years.
So you take two or 40,000
divided by 27 one half and I'm rounding, but it's about $9,000
a year in depreciation deductions
so if we go through
where we had all these deductions and we start at 20,000
and after we had gotten through mortgage interest deductions, property
taxes, repairs, insurance management fees,
we were at 8500 in net income
well now with 9000 of depreciation deductions
which again are not real deductions because as long as the property
value is staying the same or appreciating
which historically it does appreciate
and especially in today's environment with inflation, it's not a true deduction.
But now we're writing off $9,000
against our 8500 of income,
which brings us to a -500 taxable
loss that you could potentially use to offset other income.
And that's what makes real estate so great.
So again, when you are at the end of the tax year
and throughout the year, make sure you're keeping great records,
keep records of what you paid for the property,
keep records of all of your repairs and all these other deductions
so that you can give them to your CPA, take advantage of them
because the last thing you want to do is pay more tax than you're obligated to.
Thanks for watching the video.
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