My Favorite Real Estate Tax Deductions
Jay Evan Schoenfeldt | March 17, 2021
Here we are in March and I’m feeling pretty optimistic about where we are headed in regard to both the pandemic and real estate. The beginning of spring excites me because the days get longer which means I can work more, play more, or both. I love being a real estate broker, but I also love the outdoors. All work and no play is no fun at all.
Spring also means taxes; the sooner I get these done, the more time I have to show homes, cycle, and hike. This year I re-learned how the reward system works while training my pandemic puppy, Bear. I made it a priority to finish my 2020 tax returns early to earn my reward: a long bike ride. This brings me to this post's topic…
Owner Occupied Principal Residences
Sale of Residence. If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases). To claim the exclusion, you must have a) owned the home for at least two years and b) lived in the home as your main residence for at least two years.
Home Mortgage Interest. You can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness. However, higher limitations ($1 million or $500,000 if married filing separately)) apply if you are deducting mortgage interest from indebtedness incurred before December 16, 2017.
Refinance Points. You can deduct the origination points you paid if they were used to “buy down” your interest rate for your principal residence in the tax year of the refinance.
Property Taxes. The total deduction allowed for all state and local taxes (for example, real property taxes, personal property taxes, and income taxes or sales taxes) is limited to $10,000; or $5,000 if married filing separately.
1031 Tax Deferred Exchange. You can defer taxes on a sale when you exchange (or sell) real estate used for business, like a rental property, for another investment property that is the same type; you are not required to recognize a gain or loss under Internal Revenue Code Section 1031 as long as the property you purchase is of greater value than the property you sell and you carry the same amount (or more) debt going forward.
Depreciation Deduction. Depreciation is a capital expense. It is the mechanism for recovering your cost in an income-producing property and must be taken over the expected life of the property through yearly tax deductions. You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. You can’t simply deduct your mortgage or principal payments, or the cost of furniture, fixtures, and equipment as an expense. You can deduct depreciation only on the part of your property used for rental purposes. Depreciation reduces your cost basis for calculating a gain or loss on a later sale or exchange.
Mortgage Interest Expense. You can deduct the mortgage interest you pay on your rental property. Unlike your principal residence, you are eligible to deduct 100% of the mortgage interest because the IRS views this as a business expense. The same goes for #8 below.
Property Taxes. You are eligible to deduct 100% of the property taxes. The $10,000 cap on this deduction is not applied to rental properties like it is to principal residences.
Maintenance & Repairs. Operating a rental property has operating costs like maintaining your property and repairing systems when they fail. Those are all eligible tax deductions.
Pretty amazing deductions when you think about it! Now go outdoors and have some fun.
Disclaimer: Please consult your own accountant regarding the above information as each person has unique circumstances that may make them eligible or ineligible for certain deductions. Do not solely rely on the above information without consulting with a professional certified public accountant.