Tax Information on Expenses Related to Non-Rental Investment Income
The income and expenses from rental properties are reported on Schedule E, where you're allow to write off all of your ordinary and necessary operating expenses. However, some of the expenses you incur in earning most other investment income are written off on Schedule A. Your brokerage expenses, on the other hand, get included with your capital gains on Schedule D and Form 4797.
Allowed Schedule A Deductions
Investment expenses are deductible as part of your miscellaneous deductions on Schedule A. Within that category, the Internal Revenue Service gives you relatively wide latitude to write off expenses. You can deduct the cost of accounting, legal or investment advice and of service plans and custodial fees. The IRS will let you write off the cost of an office or of employees or contractors you use in conjunction with your investing activities. Investment interest is deductible to the extent that it offsets taxable profits.
Schedule A Deduction Limits
Deducting investment expenses on Schedule A has some limits. If you don't itemize, you can't claim the deduction, and you can only claim miscellaneous deductions, which include all of your expenses other than interest, to the extent that they exceed 2 percent of your adjusted gross income. If your AGI is $250,000, for instance, you can only deduct investment expenses that exceed $5,000. Finally, if you pay the alternative minimum tax, you lose your ability to write off your investment expenses completely, although the investment interest deduction remains.
Commissions to buy and sell investments don't get reported as expenses. Instead, you use them to calculate your capital gains. The IRS has you add the commission you paid to buy an investment onto its purchase price and subtract your selling commission from its sale price. For example, if you pay $0.50 per share in commission and you buy a stock at $30 and sell it at $50, your cost basis would be $30.50 and your sale basis would be $49.50, giving you a net gain of $19. You pay taxes on the $19 after-commission profit, rather than on the $20 before-commission profit.
Real Estate Mortgage Investment Conduits
Certain types of real estate debt investments are treated in the same way as rental properties. If you own a residual interest in a real estate mortgage investment conduit, usually called a REMIC, you report its income and expenses on Schedule E. REMICs take the income from a pool of mortgages and split them up into chunks called regular interests. The more senior an interest, the safer it is because it's paid sooner. When all of the regular interests are paid off, the owner of the residual interest is paid. Residual interests are riskier, but they are priced accordingly and can offer high returns.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.