For many real estate investors, owning multiple homes presents a wide array of opportunities and challenges alike. Documenting the various income streams you derive from these properties, as well as the expenses associated with them, is a time-intensive process that is also a practical necessity in order to ensure that your yearly taxes are filed correctly. Fortunately, you can leverage your expenses in order to create numerous opportunities for rewarding taxable deductions. Through careful accounting and strategic planning, you can ensure that your annual deductions help you reduce your overall tax burden.
Identifying Your Deductions
You can quickly begin identifying deductions that are available to you as a property owner. If you are using your properties for commercial purposes, any and all expenses associated with the upkeep, operation or promotion of these units can qualify as a tax deduction. For example, if you install new hardwood floors in one of your properties, all of the costs associated with this unit, such as parts and labor, will qualify as a deduction. Likewise, if you hire a marketing firm to help you promote your real estate to potential tenants, all of the fees associated with this service are eligible for deduction.
In addition to the expenses you generate from owning these properties, you can also deduct a variety of expenses that result from financing them. For example, all of the interest up to $750,000 that you pay on your properties as part of a mortgage repayment plan will qualify as a deduction. Your particular mortgage repayment details will not affect these deductions.
For example, your deduction status will not change regardless of whether your mortgage features a fixed or variable interest rate. A mortgage interest deduction is a powerful way to reduce your annual tax bill. If you are curious what deductions may await you, you can use a mortgage tax deduction calculator to learn more about this process.
Of equal importance is the property tax deduction. When it comes time to file your taxes, you can deduct all of the property tax you pay on your property, assuming that you are eligible to itemize your deductions. Deducting real estate taxes on multiple homes is a common practice among real estate investors across the country.
Exceptions to Deductions
Certain exceptions may limit your ability to deduct portions of your expenses or your taxes. As stated previously, there is an upward limit on the amount of mortgage interest that can be deducted on property. If you own enough properties to generate more than $750,000 in mortgage debt, your deductions will be limited to this sum. All interest generated on mortgage sums above $750,000 will be non-deductible.
Regarding your property tax deduction, you will only be eligible for the property tax deduction on second home purchases or additional properties if your list of expenses is greater in total than the standard deduction amount. If this is not the case, you will not be able to claim property tax on your list of qualifying deductions. Because of this stringent requirement, it is possible that some real estate owners may not qualify for property tax deduction on second home lots for years at a time.
Also, if you are claiming property-related expenses while deducting real estate taxes on multiple homes, these expenses must exceed an IRS mandated benchmark of 2 percent of your adjusted gross income. If these expenses do not meet or exceed this sum, they cannot be deducted.
Understanding 2018 Tax Law
When preparing your 2018 taxes, you can use the IRS Form 1098, Mortgage Interest Statement, in order to document all mortgage interest that exceeds a total of $600. This form will be instrumental in helping you claim your deduction.
Form 1040 can be used to document and deduct your property taxes, assuming you meet the qualifications mentioned previously. Transfer the mortgage interest and points reported on Form 1098 to Line 8a of Schedule A (Form 1040). If there's mortgage interest that's not reported to you on Form 1098, enter this amount on Line 8b. After completing the rest of Schedule A, transfer the amount on Line 17 to Line 8 of Form 1040.
Ryan Cockerham is a nationally recognized author specializing in all things business and finance. His work has served the business, nonprofit and political community. Ryan's work has been featured on PocketSense, Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.