Uncle Sam gives, and Uncle Sam takes away.
But in the case of buying local Fort Myers investment properties… you can earn investment property tax deductions for your Fort Myers properties.
For real estate investors, the United States provides the opportunity to earn a living purchasing investment properties… and holding those properties as investments, and of course the income from those properties is taxed.
But many new investors often overlook tax deductions that could have an impact on their bottom line. Today, we’re going to take a look that Fort Myers FLORIDA real estate investors can take advantage of.
Income Sources You Can Potentially Deduct
- Repairs and expenses paid by rental tenants are considered income. This could include an emergency water heater repair that tenant took care of on his own. These repairs can be deducted.
- In some cases, tenants will trade repairs and upgrades to a rental unit for a reduction of rent. These services can be deducted, so long as they’re claimed as income, and must be charged at fair market value. You cannot work out a deal with your tenant to fix a light switch for three months rent, then deduct that ludicrous “income” on your tax return.
Security Deposits
Security deposits are considered a financial safeguard for landlords, not income. Since the intention is to return the money to the tenant upon fulfilling the lease agreement, the initial receipt of the security deposit isn’t taxed. It’s treated more like holding onto collateral until the terms of the lease are met.
However, things change if a tenant breaches the lease or leaves the property in a state requiring repairs beyond normal wear and tear. In such cases, the landlord can retain all or a portion of the security deposit to cover the cost of repairs. Here, the retained amount becomes taxable income because it serves as compensation for damages incurred, not a simple return of a deposit. It’s crucial to note that the retained amount is only taxable if it’s used for legitimate repairs. If the landlord pockets the money without making the necessary fixes, they wouldn’t be able to claim it as income for tax purposes.
These repairs are deductible expenses.
Make sure with your accountant or local property manager that they’re handing your security deposit accounting correctly so you’re not paying income tax on security deposits that you’ll be turning right around and paying back when a tenant leave.
Other Common Investment Property Tax Deductions
- The portion of your mortgage that is directed towards interest is 100% tax-deductible. Your mortgage lender will provide you a form in January stating this total.
- Travel to and from the property to make improvements, show the property, or collect rent are considered work expenses, and deductible.
- Certain deductible expenses that investment property owners take advantage of include taxes, insurance, tax return preparation costs, lawn & garden care, losses resulting from theft or “acts of god” (floods, earthquakes, and other disasters), legal and professional services.
- Depreciation on the value of the property is deductible. This can be complicated to calculate, and it’s recommended to speak with a local Fort Myers accountant.
- Your home office, if used to run your real estate investment business, can help generate tax deductions as well as long as the home office meets the minimum requirements (consult your tax advisor)
Owning investment properties can be a great way to build wealth, but it’s important to remember that Uncle Sam takes a cut. To maximize your profits and accelerate your real estate journey, be sure to explore all the tax deductions available to you as a landlord. This can include things like mortgage interest, property taxes, depreciation, repairs, and certain management fees. By lowering your tax liability, you’ll keep more of your rental income, which can then be used to reinvest in your existing properties or even put a down payment on a new one.
However, tax deductions aren’t the only way to save on taxes. Tax laws can be complex and change frequently, so it’s wise to consult with a financial advisor or certified public accountant (CPA) who specializes in your market. These professionals stay up-to-date on the latest tax codes and can identify additional strategies specific to Fort Myers investment property owners. This could involve deductions you might not be aware of, depreciation recapture rules, or even tax-advantaged retirement accounts that can help shelter your investment income. By working with a qualified financial advisor, you can ensure you’re taking full advantage of all the tax benefits available to you.