As housing prices have come down and former homeowners start renting, the interest in real estate investing has increased. The tax code concerning real estate investments is complex, so if you are thinking about investing in real estate, you need to understand certain issues. This article presents a brief overview of what you’ll need to know, but the information is not all-encompassing and in many cases depends on your unique situation. Thus, always consult with an accountant.

Do you use the property personally?

If you are renting out part of the house you live in, you can only deduct expenses attributable to the rented part of the house (either directly or in proportion to). If you are renting out a vacation home, the math equates to the number of nights rented in proportion to the total number of nights the house is occupied. The good news is that if you rent out a place 14 days or less, the income is tax free.

Do you keep track of your mileage?

If you are actively managing your property, you probably are driving to and fro a lot. Keep a log to track your mileage. Log the starting and ending odometer readings, as well as the purpose of the trip. You will then be able to deduct an amount per mile (varying yearly). If the trip has a personal purpose as well, you can only deduct the business portion, and if you are making improvements, travel expenses need to be depreciated.

Are you claiming all your expenses?

From the time you make your property available to rent, you can deduct all \”ordinary and necessary\” expenses you incur for the property. These include advertising, cleaning, commissions, insurance, maintenance, management fees, mortgage or other interest, points, professional fees (e.g., legal or accounting), rental payments, repairs, taxes, travel expenses, utilities, and yard work.

Are you an active or passive investor?

While choosing properties to invest in does require a lot of activity, the IRS is concerned with whether you are involved in the daily management of the property. If your only involvement with the property is cashing the check your property management company sends you, you are a passive investor, and you can only deduct any real estate losses from other passive income, such as interest or dividends. If you don\’t have enough, you may be able to accumulate the losses until you sell the property. If you do actively manage the property, you may be able to take up to $25,000 in losses off of your earned income.

Are you depreciating your property properly?

The IRS does not allow you to deduct the purchase price all at once; instead, you have to depreciate the cost over the expected life of the property. This applies to the building, any improvements, and furnishings, although the period is much shorter for the latter. Note that the value of the land cannot be depreciated. It is best to use tax software or a tax professional to calculate this.

Are you making repairs or improvements?

Improvements can add significant value to, or can dramatically extend the lifespan of, the property. Repairs, on the other hand, just maintain the current value. Thus, replacing a few shingles is a repair that gets deducted the year it is done; replacing the entire roof is an improvement that gets depreciated. Note that this rule also applies to assessments such as street repair.

Bottom Line

Again, it’s worth repeating that this article is not designed to give you specific tax advice per-se; rather, the goal is simply to outline some of the key factors you’ll need to be aware of. The bottom line is that any real estate investor should have an accountant, so consult with that person for specific recommendations applicable to your own unique situation.

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Visit http://www.free-rental-property-investing-info.com for free landlord forms, tools, and no-hype educational info focusing solely on investment property. Browse topics like buying a property, landlord insurance, landlord tenant laws, and much more.

Author Bio: Visit free-rental-property-investing-info.com for free landlord forms, tools, and no-hype educational info focusing solely on rental properties. Browse topics like buying a property, landlord insurance, PMI, foreclosure property, and much more.

Category: Advice
Keywords: rental property, rental property tax, investment property, real estate investing