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 All
Operating Expenses incurred via the
operation and maintenance of an income producing property
are tax deductible. They include such things as
accounting fees, advertising costs, legal fees, insurance premiums,
janitorial service, lawn maintenance service, leasing commissions,
license fees, office supplies and expenses, pest control, property
management fees, property taxes, repair costs, salary and wages,
snow removal service, misc. supplies, telephone, trash removal,
vehicle mileage expenses, utilities, etc. All
Mortgage Interest
paid on any loan or loans secured by income property is tax deductible.
All Points
paid on any mortgage or loan secured by an income producing property are
deductible over the life of the loan. For example, if you
obtain a $100,000 loan with a 20 year term and you pay 1 point to
obtain the loan, you can write-off $50 a year over the 20 year
period for a total of $1,000. If you sell the income
property and pay off the balance of the mortgage early, you can
deduct all unused points in that year.
Miscellaneous
Closing Costs connected with the purchase
of an income property such as title search fees, title insurance, appraisal
fees, loan application fees and recording fees are deductible in the
year of purchase.
Depreciation
is the loss in value of an asset or
building
over time due to wear and tear, physical deterioration and age. The
IRS allows you to depreciate income producing properties over their
useful life which is determined by law. Current law stipulates
that residential income properties must be depreciated over 27.5
years and commercial income properties over 39 years. For
example, you purchase a warehouse for $900.000 in January. The
land where the warehouse resides is valued at $120,000. The
building is valued at $780,000. Commercial property is
depreciated by equal amounts annually over the 39 year period.
Since you purchased the income property in January, the IRS rules
allow you to write-off 11 1/2 months of depreciation in the first
year or $19,167, 1/2 month of depreciation for January and 11 full
months of depreciation for the remainder of the year. For the
next 38 years you would deduct $20,000 a year and in the 40th year,
the final year, you would write-off the remaining 1/2 month of
depreciation , $833.
Capital Improvements
are subject to the same depreciation method as the
building above. Capital improvements include a new roof, new siding,
a new addition to a building, etc. Capital improvements to a
residential income property are depreciated over a 27.5 year period.
Capital improvements to a commercial income property are depreciated
over 39 years.
Personal
Property includes such items as furniture,
appliances, lawn mowers, snow removal equipment, etc. which are not
permanently attached to the land or improvements. Depending on the
type of property, a recovery period of 5, 7, or 10 should be used.
Check with your accountant to determine the appropriate recovery
period for a specific type of personal property.
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