In almost every country, the government strongly encourages investing in real estate by offering tax credits and deductions. Investors who use these incentives reduce their taxes, freeing up cash to invest and build wealth.
Here are the top ten tax credits and deductions that can help you maximize rental property profits.
1. TAKE THE HOME OFFICE DEDUCTION
Unlike W-2 employees who burn the midnight oil from home, business owners may deduct the expenses associated with having a home office from their taxes. Yet far too many people fail to take this deduction. Work with a CPA who will help you use and document your home office expenses correctly so you don’t miss out.
2. DEDUCT YOUR TRAVEL EXPENSES
Once you’ve established that your primary office is at home, your deductible travel expenses will increase significantly. Whether you’re driving locally to meet with tenants, check on properties, oversee maintenance, or flying across the country to manage a far-flung portfolio and/or search for a new property, business travel is a significant deduction.
3. INCLUDE ALL OF YOUR VEHICLE EXPENSES
This category is a little complex, so it deserves a place on the list separate from travel expenses. If you use your vehicle for rental activities, such as driving to your properties or picking up supplies, you can claim either the standard mileage rate or actual expenses like gas, maintenance and depreciation. Work with your CPA to determine which is better for you.
4. DON’T SKIMP ON PROPERTY MARKETING
Advertising is crucial to attracting tenants. Any money you spend on marketing your rental properties, such as online listings, brochures, etc., is fully deductible.
5. DEDUCT ANY MANAGEMENT FEES
If you hire a property manager to handle day-to-day operations, their fees can be deducted. This also applies to fees paid to attorneys, accountants and other professionals related to your rental business.
6. USE COST SEGREGATION AND BONUS DEPRECIATION
I speak with a lot of real estate investors every year, and I continue to be shocked by how many people avoid a cost segregation analysis because someone told them it would get them flagged for an IRS audit. This is terrible advice (and often a sign the investor needs a new CPA). Cost segregation, coupled with bonus depreciation, is the correct way to depreciate your investment — saving you a ton on taxes.
7. DEDUCT YOUR PASSIVE LOSSES
While no one likes losses, losses on an apartment rental can offset other income, reducing your overall tax bill. Typically, rental real estate losses are considered passive and must offset other passive income. If your only other sources of income are active, don’t throw in the towel on this item. Work with your tax advisor to see how to restructure your active income to create passive income.
8. ADD ELECTRIC VEHICLE CHARGING STATIONS
Governments offer substantial incentives to people willing to help build infrastructure to support switching from gas to electric vehicles. If you qualify for these tax credits, it’s an excellent opportunity to get the government to help pay for an upgrade to your property that will help you appeal to tenants who drive EVs.
9. INSTALL A SOLAR POWER SYSTEM
Like charging stations, solar systems come with great tax incentives right now. The federal investment tax credit for solar systems is 30% through 2032, and bonus depreciation is still available. Use these incentives to get the government to help pay for another property upgrade.
10. HIRE YOUR KIDS
Rental properties need a lot of regular, unskilled maintenance. Hiring your teenage children to handle basic landscaping, snow removal and other tasks can be a great solution. You’ll deduct the expense of the wages you pay them, and they’ll earn money that’s taxed at a lower rate than yours. Who knows? You could inspire your kids with a love of real estate, just like my mom and dad did.
TOM WHEELWRIGHT®, CPA
CEO
WealthAbility
Tax and wealth expert Tom Wheelwright® is a CPA, CEO of WealthAbility®, Rich Dad Advisor, entrepreneur, international speaker, and author of the bestselling books The Win-Win Wealth Strategy and Tax-Free Wealth. Wheelwright is the CPA for Robert Kiyosaki and has spoken on stage on six continents to over 100,000 entrepreneurs, small business owners and investors. He also is the host of two popular podcasts: The WealthAbility® Show with Tom Wheelwright® CPA and The WealthAbility® for CPAs Show.
