Tax Advantages of Real Estate Investments - Article Banner

Investing in rental real estate provides investors an opportunity to earn consistent and recurring rental income, which is taxable. However, you won’t have to worry about increasing your tax exposure too much because the benefits and deductions actually help to reduce that income quite a bit. 

There are a number of tax advantages that are unique to this investment class, and you want to make sure you’re taking advantage of every tax break for which you qualify. It is important for any investor to be aware of the potential tax benefits associated with rental properties. You want to make informed financial decisions and maximize your profits, so carefully document what you earn and spend and use the deductions available when it’s time to file your taxes. 

Here are some of the most important tax advantages that real estate investments can provide you. 

Deduct Interest on Your Mortgage

When you own an investment property, the first place you can find a way to maximize your tax benefits is by deducting mortgage interest. 

As a landlord, you are eligible to deduct the interest you paid on your rental property mortgage as a business expense on your federal tax return. This helps you to reduce your taxable income and potentially increase the amount of refund you receive. 

When you’re taking your mortgage interest deduction, it’s essential to keep detailed records of all mortgage payments, as well as any associated expenses such as property taxes and insurance premiums. 

Check your monthly mortgage statement to see how much interest you’re paying. You’ll want to deduct the annual amount on your tax return. 

In addition to mortgage interest, you can also deduct many of the expenses that come with procuring a mortgage. These include: 

  • Origination fees 
  • Points used to purchase or refinance your rental property
  • Interest on unsecured loans used for improvements 
  • Credit card interest for purchases related to your rental property

You will need to document that you already spent the money on these things in order to use them as deductions. Understanding your tax benefits is crucial for maintaining your investment property’s profitability, and deducting mortgage interest is a valuable tool for achieving that goal. 

Deduct Rental Property Maintenance and Repair Costs 

The IRS allows rental property owners to deduct some repair and maintenance costs. 

The maintenance costs will qualify as deductions if you’re spending money to keep your property in rentable and habitable condition. Repairs that are made to improve the value of your property will be excluded. You cannot replace carpet with hardwood floors and write off the expense, for example. According to the IRS, improvements are classified as anything that provides betterment, adaptation, or restoration. There’s still a place for these deductions, but you’ll have to depreciate them. They cannot simply be written off as maintenance or business expenses. 

If you hire someone else to do the repair work, you can deduct those labor costs. However, if you decide to do the work yourself, you can only deduct what you spent on materials, tools, and equipment. 

Property Taxes and Insurance Premium Deductions are Available 

Property taxes have likely risen on your rental home, if like most properties, its value has increased over the last few years. Taxes aren’t cheap, and luckily, you can deduct them when you’re paying taxes on a home you’re renting out to tenants. 

Taxes on your rental property are assessed locally, but you can claim up to $10,000 on your federal tax return ($5,000 if married filing separately). 

Deduct your landlord insurance premiums as well. Most lenders will require that you purchase insurance before you qualify for a mortgage and close on the purchase. Your basic dwelling coverage can be deducted as well as liability and special peril premiums.

IRS Deductions on Depreciation for Rental Property in Charlotte

The IRS standard for depreciation is fairly generous, and this benefit is in place for rental property owners because it’s normal to expect that wear and tear will eventually lower the value of your rental property. The deduction can be taken for the expected life of the property, but it must be spread out over multiple years. 

Currently, the IRS has set that at 27.5 years. So, you’ll use that number to calculate your depreciation. You cannot include the value of the land your property is on; you’re simply using the value of your house. Divide the cost of your property at the time you acquired it as a rental by 27.5. That’s the amount of depreciation you can include in your tax return. 

Something important to be aware of: you cannot deduct the depreciating value of any land. This depreciation deduction is strictly for the building or the home that you own and rent out. 

Earlier, we mentioned that property improvements would have to be considered under the depreciation deduction, not the deduction for maintaining your rental home. Let’s dive into that a little deeper. 

Money you spend to improve your Charlotte rental property is depreciated as well over those 27.5 years. An improvement is anything that enriches the value or usefulness of your investment property. It’s a renovation you might make to restore it to new or like-new condition.

Improvements can be many things, and most commonly they are: 

  • Adding onto your property – whether it’s a garage or a new office space. 
  • Finishing the basement.
  • Installing a new air conditioning system or a furnace. 
  • Roof replacements 
  • Adding tile or upgraded floors. 
  • Making accessibility updates, such as a wheelchair ramp.

Routine repairs and maintenance are not considered improvements. They are business expenses. 

These are a few of the deductions you can take when you’re estimating your rental property taxes. Remember to declare all of the income you earn on your property, and always talk to a tax expert before you file. When you work with a Charlotte property manager, you can expect a timely 1099 for your filing purposes as well as any supporting documentation around your income and expenses. 

Contact Property Management CompanyIf you’d like to chat more about how tax deductions can help you earn more on your rental property, please contact us at Wess Cason Realty. We provide real estate and property management services in Charlotte and the surrounding areas in Mecklenburg, Union, and Cabarrus County. 

Photo of Wess CasonWess Cason, Owner/Broker

Wess Cason has over 30 years of residential real estate experience to include property management and associated repair projects. His maintenance team is now expanding their repair & renovation scope beyond property management services to our neighborhood community. We are local and own our offices located in Matthews. We service where we live.

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Photo of Jonathan CasonJonathan Cason, Director of Operations

Jonathan Cason is our Director of Operations. Jonathan brings 20 years+ of top-notch customer service experience to the table that includes mortgage lending, property management, and real estate. He is excited about bringing such a well diverse team to the SE Charlotte area and to your homes!

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