There are many tax deductions available for real estate investors with multi-family properties. I’m always surprised to learn of the number of investors who don’t know about these deductions and thus pay more in taxes than they need to. The best part is that these deductions are available to every investor, no matter the tax bracket. Here is an alphabetized list of the most common allowable tax deductions as of January 2019.
Advertising and Marketing
Whenever you advertise your property, the amount spent is tax deductible. You may need to advertise for:
- Filling vacancies
- Hiring a manager
- Hiring maintenance staff
Additionally, you may have subscription fees for real estate websites for property listings.
Auto and Travel
If you have to travel in order to deal with your multi-family property, then the travel expenses are deductible.
- Individual property – business use of car: Visiting property for showings, repairs, or other operational needs
- Overall business – business use of car: Driving by car for business-related tasks like going to the post office or driving to a service provider like an attorney.
- Other travel: Airfare, hotels, meals, rental cars, tolls, and parking as long as the trip is for property-related activities. Be sure to prorate the trip if the entire trip is not dedicated to business.
Business Entity Pass-Through Deduction
Sole Proprietorship, Partnership, and Corporate Entities can take advantage of a “pass-through” deduction. Multi-family property owners can deduct 20% of their income from their taxable business income amounts as long as they do not have an income over $157,500 for single payers and $315,000 for married payers.
Many real estate service providers charge a commission for their work. Whenever you use a provider that charges a commission, you can deduct that amount on your taxes. The most common providers who charge a commission include:
- Real estate agents
- Property managers
- Other salespeople
You may also deduct commissions you paid for referrals.
Depreciation is a deduction that treats wear and tear on your property as an expense, even if you are not spending money to maintain or fix that wear and tear. Interestingly enough, even when taking depreciation, your property may be rising in value.
Determining how to take depreciation can be tricky. I recommend that you:
- Keep proper records
- Get assistance from a CPA or other tax professional
Equipment purchased to run your real estate investment business is tax deductible as long as you can document that you used it for business purposes. This includes such things as:
Fees and Taxes
As a multi-family property owner, your property will be subject to a variety of state and local taxes and fees, which are tax deductible. The most common taxes and fees include:
- Property taxes
- Licensing fees
- Occupancy taxes
When you own property as a real estate investor, all insurances for these properties are tax deductible. Standard insurance includes:
- Wind and Hail
If your liability insurance covers more than one property, you will need to speak with a tax professional concerning how to deduct the cost.
Legal and Professional Fees
Most legal and professional fees are applied to your business rather than a specific property. However, there may be times when a fee is property-specific. Either way, keep track of accounting and legal fees and take the appropriate deductions.
Maintenance and Improvements
Both maintenance and improvement costs are deductible. However, maintenance and improvements are handled differently. Maintenance items are needed for normal operation of the property and typically are ongoing. These are deducted in full in the year they are completed. Improvements, on the other hand, are one-time items used to improve the property. These are depreciated between five and 27.5 years, depending on the improvement. Always talk with a tax professional to determine how to classify and depreciate this type of work.
Although most people think of office supplies for this category, it can also include other items such as:
- Legal forms
- Maintenance supplies
- Cleaning supplies
- Building supplies
Be sure to keep accurate records to determine which supplies are for your entire business and which supplies are property-specific.
Tenant screening can be costly. Thankfully, fees for tenant screening reports are tax deductible. These include:
- Credit reports
- Background checks
- ID verification
- Income verification
- Housing verification
In most instances, utilities are paid for by the tenant in a multi-family property. However, it is possible that you are paying for standard utilities or extras like recycling, cable, or Internet. Whenever you pay for utilities, you can deduct the cost on your taxes. Remember, however, that if you deduct a utility expense and are reimbursed by the tenant, that reimbursement must be recorded as income.
Wages Paid to Employees and Independent Contractors
As a real estate investor, you likely have people who do work for you, either on a regular or a sporadic basis. Whether you’ve hired someone to clean, paint, or manage the property, the money you pay for the work to be accomplished is tax deductible. Be sure that you hire them directly. Third-party hires are not tax deductible.
Tax deductions will help you offset the income you have to report to the IRS, and there are many legitimate deductions available to those investing in multi-family properties. However, always talk with a tax professional to be sure that you know how to record and report your deductions appropriately.