advisors and tax experts are recommending a little year-end financial housecleaning. For investors in income property, this means taking a look at existing and potential tax deductions before the end of the year. There may still be time to squeeze in a few more deductions before December 31 rolls around.
Expense or depreciation? Generally speaking, repairs to a property, such as fixing a hole in the roof, are written off as expenses in a given tax year, while improvements such as putting in a completely new roof are depreciated over the life of the improvement, or of the rental property itself. Short-term assets related to the property, such as refrigerators, air conditioners and other appliances, can also be depreciated over a five-year span. External assets such as sidewalks, fencing or patios depreciate over 15 years. It’s important to consider everything related to the property’s appearance and functioning to maximize tax deductions.
Tax advisors also recommend “accelerating” expenses and income related to the property by timing them for 2012 rather than delaying them till after the New Year. Some ways to do this include receiving January income in December, if possible, or purchasing needed goods and services and paying the bills for these before year’s end. Qualifying purchases can include advertisements, printing and printing supplies, insurance and even subscriptions, association memberships, seminars and courses.
Since interest is generally one of the largest
deductible expenses related to income property, it’s possible to increase your interest expenses for the year by prepaying a January mortgage payment. If you’re employing anyone to assist with the property, it’s also possible to prepay any Social Security, Medicare, or unemployment taxes associated with their employment.
There’s also a tax credit for hiring new employees after Feb. 3, 2010. If you hired a property manager, a contractor or landscaper for continued work, you may be able to claim a tax credit of $1000, and you may also be exempted from 6.2% of that employee”s Social Security tax. There’s also a health insurance credit for employees hired after Feb. 3, 2010.
Home office expenses are a well-known deduction, since managing income property is a business. But in addition to this, it’s also possible to deduct space used as a workshop related to maintaining rental investments. A space such as a garage or shed devoted
to storing tools and equipment needed for managing the property also qualifies as deductible under the same standards as a home office.
Travel expenses to and from the property are also deductible. This includes actual expenses or standard mileage. And for property owners following Jason Hartman’s advice to diversify holdings in more than one market, airfare, accommodations and even entertainment related to managing the property can be deducted.
Nearly everything related to an income property is eligible for tax deductions or credits. December is the time to take stock and take steps to maximize tax savings in the year to come.
The American Monetary Association Team