Uncle Sam gives, and Uncle Sam takes away.
But in the case of buying local USA investment properties… you can earn investment property tax deductions for your USA properties.
The United States offers real estate investors the prospect of generating income by procuring investment properties and holding them as long-term investments, while also subjecting the earnings from such investments to taxation.
However, novice investors tend to disregard potential tax deductions that can significantly impact their profits. Today, we shall examine the tax deductions that real estate investors in USA, Nationwide can utilize to their advantage.
Income Sources You Can Potentially Deduct
- Expenses and repairs paid by tenants who rent a property are deemed as a form of income. This encompasses instances such as when a tenant takes care of an emergency water heater repair. These repairs are eligible for deduction.
- Furthermore, some tenants may offer to conduct repairs and upgrades to the rental unit in exchange for a reduction in rent. These services are also deductible, on the condition that they are declared as income and charged at a reasonable market rate. It is not permissible to agree with a tenant to fix a minor issue, such as a light switch, in exchange for three months of rent and then claim such an absurd “income” on your tax return.
Security Deposits
A security deposit is considered non-taxable since its purpose is to be returned to the tenant at the end of the lease term. Nevertheless, if the tenant breaches the lease agreement and forfeits the deposit, the landlord can claim it as income provided that it is utilized for repairs.
Such repairs can be classified as deductible expenses.
To avoid paying income tax on security deposits that will eventually be refunded to tenants upon move-out, it is recommended to consult with your accountant or local property manager to ensure proper handling of security deposit accounting.
Other Common Investment Property Tax Deductions
- The entirety of the interest portion of your mortgage is eligible for a 100% tax deduction. Your mortgage lender will furnish you with a form in January that details the total amount.
- Expenses related to traveling to and from the investment property for tasks such as making improvements, showcasing the property, or collecting rent can be considered work-related expenses and are tax deductible.
- Property owners who invest in real estate can take advantage of several deductible expenses, including taxes, insurance, preparation costs for tax returns, expenses related to lawn and garden care, losses stemming from theft or natural disasters (such as floods, earthquakes, and other unforeseen events), as well as legal and professional services.
- Depreciation of the property’s value is tax deductible. However, the process of calculating it can be complex, and it is advisable to consult with a local accountant in USA.
- If you use your home office to run your real estate investment business and meet the minimum requirements, it can provide tax deductions. It is recommended that you seek advice from a tax advisor to ensure compliance.
Investment property owners can boost their revenue and lessen their tax burden by utilizing all suitable tax deductions, which in turn could enable them to acquire more properties. It’s also worth exploring other potential means of reducing your tax liability. It’s advisable to consult with a financial advisor or certified public accountant, who are usually up-to-date with the latest tax deductions available to investment property owners in USA.