Tony Mirabile, Managing Principal
J.A. Mirabile & Associates, Inc., a tax advisory service in north Georgia.
Are you ready? Tax planning starts now!
It’s that time of year again. Not the time of year when the cat knocks over the tree, or the dog eats the presents…much worse; it’s time to start tax planning. If you’re a traditional investor, most of your work is done for you by the funds or investment broker in January. They will mail you a 1099-R or 1099-Div or 1099-Int or 1099-B or 1099-Misc or a combination of these, and sometimes others. Don’t worry; your tax advisor or preparer should know what to do with them all. The fun comes when you’re a non-traditional investor. If you own a business or real estate holdings, you’re going to need to start gathering all your expenses for the business or real estate so you can deduct them. No expenses, no deduction: more taxes paid! Your tax person won’t make stuff up for you, so you need to provide these expenses.
So, what are expenses? The answer is common sense with a lot of little “except for that” explanations thrown in. If you own a small business or a rental house or a shopping center, it’s basically the same answer. If you spent money to own it or operate it or fix it, you can usually deduct it. Let’s use the single-family rental house as our example to simplify things.
Rent received is income. There’s no dodging that one.
The interest paid on your mortgage is deductible; however, the principal paid is not. If you pay $2k per month in mortgage, only the interest portion of that payment is deductible. Points paid to reduce your interest on the mortgage are usually deductible. Your 1098-Mort sent by your lender in January will have these answers for you.
Insurance cost is deductible and just a smart thing to have.
Taxes, for this example, property taxes, are deductible. Rental house property taxes are not limited like the SALT deduction on your itemized deductions.
Simple repairs are deductible. Your renter clogs the toilet and you have to pay a plumber, deduct it. The new roof, deck, lawn, or AC unit are a little different. These are things that should last more than a few years and are not redone each time a tenant moves out, so they can be capitalized (added to the cost basis of the property so that your taxable gain is smaller when you sell) or amortized (spread out over the useful life of the repair) over several years. Your tax person will know which to use. Make sure you have these things listed by what they are, the date you did them, and the total cost.
If painting the walls is not done between each renter, capitalize it. If you paint between each renter, deduct it as a repair.
The plumber’s expense just needs to be an amount in the “repairs” category.
If you pay any utilities, like keeping the lights on between renters, deduct it.
Did you have to advertise the place to rent it out? Did you hire a management company? These are advertising expenses. Deduct them.
Ask your tax person about cell phone usage and miles you drove to manage or maintain the property.
You will have to take a deduction called depreciation. This is for the wear and tear on the building structure, but not the land it sits on. So if you paid $280,000 for an investment house on a lot valued at $30,000, the house itself, the structure, is worth $250,000. The $250k will be slowly devalued over the next couple of decades and that devaluing (tax valuation, not real market valuation) is an expense to reduce each year’s taxable income.
There are many more deductible expenses than these. Ask yourself: did I spend that money to make the house make money? If yes, then write it down and give it to your tax preparer. If you have questions, ask your tax preparer. Having a good tax advisor is worth much more than they charge…and what you pay them is deductible, too.
Caveats: This was a generalization, so ask your tax person your specific questions and keep in mind that all tax rules vary by state.
*Tony Mirabile is the managing principal at J.A. Mirabile & Associates, Inc., a tax advisory service in north Georgia.