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Legal Tax Deductions For Rental Properties

Written by David Roberson, Esq. on . Posted in Landlords, Palo Alto, Property Management, Silicon Valley Real Estate Investing


AA Expenses ReceiptsCalcAre you a rental property owner? If so, it’s great isn’t it?  You receive income from the rents, also known as other people’s money (OPM), and you realize capital appreciation from the equity gains in the value of the property – a rising tide raises all boats.  In fact using OPM is a great strategy for paying for your child’s college education, and providing a passive income stream for yourself in your retirement.  The key is buying and holding onto an investment property as soon as possible and taking full advantage of the Internal Revenue Code (IRC) allowable deductions and expenses.  Becoming educated about this investment strategy is easy, fun, and should be taught to your children.

Deductions Are Your Friends In The Rental Property Business

AA Expenses MultiFamilySF

I’m sure you also know that many of the expenses that you incur that are rationally related to your rental property are tax deductions against any income that you earn.  But did you know that you may qualify for a greater tax advantage than 95% of passive real estate investors?  If you spend more than one-half of your time working your rental property business, including development, construction, acquisition, or management, and spend 750 hours a year in the real estate operations you can qualify for the Internal Revenue Service “Real Estate Professional” status.  This is a big tax bonus that many people don’t realize exists.  If you have “Real Estate Professional” status your losses, including depreciation against your rental properties, can be deducted against your ordinary income, not just your rental income.  If you have multiple rental properties this can be a huge tax savings as rental properties are allowed to be depreciated over a 27-1/2 year period.  There are many people who are leaving a lot of money on the table each year because they are not familiar with this “Real Estate Professional” status.

AA Expenses CartoonImprovements Are Not Repairs

There is a world of difference between the term “improvement” and the term “repair.”  The IRS takes great exception to people who attempt to expense a kitchen remodel or a new roof on their rental property.  Both of these projects would be considered an “improvement” and would have to be deducted over the lifespan of the component.

Repairs on the other hand are small projects that keep the rental property operating smoothly – like a leaky kitchen faucet that gets replaced, or a broken toilet flange, or a failed smoke alarm.  These repairs are expenses which can be deducted in the tax year for which they were made.

Travel expenses can be expensible deductions as well if you are making a trip to maintain the property, or have a discussion with the tenant, or to collect a rent check.  However, if the transportation expense was borne due to some planned improvement like a bathroom remodel then the travel expense would not be expensible and would be allowed to be depreciated with the improvement.

Common Expenses That You Shouldn’t Forget

There are numerous legitimate expenses for rental property owners.  They include mortgage interest, insurance expense, property taxes, gardening maintenance, legal fees, property management fees, leasing expenses, advertising expenses, damages to the property, office supplies to run your property business (if applicable), and bank fees to name the common ones.

AA Expenses BookReceiptsProfessional Property Managers Keep Records And You Should To

If you hire a competent professional property manager to run your rental property business they will keep good records for you as they are required to by the law.  Professional property managers will provide you with timely monthly statements which include income, expenses, invoices, and notes.  Also, you should receive a detailed Profit and Loss statement in early January of the following year.  If you don’t receive detailed statements like this you should seek to hire another property manager.

If you manage the property by yourself you should be keeping these records (and copies or scanned files) of every document that is created related to the rental property business. This is crucial for two reasons: 1) tax audit preparation, and 2) litigation preparation.

AA Expenses Law BooksProfessional Property Management By Real Estate Attorney

If you are fortunate enough to find a professional property management group that has a real estate attorney on staff that would be a great value.  The legal expertise alone provides a value added service which 99% of property managers can’t match.   Silicon Valley Property Management Group (SVPMG) is a full service property management company that manages, develops, and sells real property on the Peninsula and specifically Palo Alto.  SVPMG has a full-time  on staff and can provide risk mitigation along with typical property management services.


David Roberson, Esq.

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David Roberson, Esq.

David is a licensed real estate attorney, a licensed real estate broker, and has been involved in the real estate business since he graduated from college in 1986. David has personally been involved in hundreds of real estate transactions, has personally inspected over 2,500 residential properties, 12 million square feet of new commercial construction, and is an expert in 12 separate building code categories. David and his wife Shelly have owned a personal portfolio of investment properties in several states including the bay area since 1998. David currently is the broker/owner of Silicon Valley Property Management Group (SVPMG) which manages 150+ client properties on the San Francisco Peninsula. Trust, transparency, and performance guarantees are the foundation of SVPMG. David challenges anyone to find a PM company that offers services similar to the extensive education, customer service, and performance guarantees provided by SVPMG. David also provides consulting for his clients on property development feasibility, construction, and complex real estate transactions. David has authored a published law review article, two real estate books, and over 120 real estate blog articles.

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