Professional Real Estate Investors
If you are a real estate agent or broker, a landlord, a professional property manager, a developer, or are in the construction business then the IRS considers you to be a Real Estate Professional. As such, you are privy to claim a number of tax deductions that the general public can not take advantage of. The following are the categories of expenses that are typical to business professionals and examples that are specific to the Real Estate Professional.
AUTO TRAVEL: Your deductible auto travel expenses are based on the number of qualified business miles that you drive during the year. Your trips between home and work each day or between home and one or more regular places of work are considered commuting miles and thus are not deductible. However, travel between business locations or daily transportation expenses in going between your residence and temporary work locations are deductible and thus should be counted as business miles.
Examples of deductible business mileage is travel to and from: client meetings; escrow; lenders; showings; caravans; continuing education classes or programs; out-of-town business trips; etc. In addition to the mileage deductions, out-of-pocket expenses for: parking meters; tolls; and valets are 100% deductible. Make sure to keep receipts for all car operating expenses - gas, oil, repairs, insurance, car washes, car loan interest, vehicle registration, etc.
Make sure to document your business miles in a record book or calendar. Try whenever possible to: (1) identify the date and business purpose of each trip; (2) note the name of the destination to which you traveled; (3) record the number of business miles traveled; and (4) always try to record your car's odometer reading at both the beginning and end of the tax year.
When considering getting a new car, contact your tax adviser to review the tradeoffs of leasing versus buying. And always make sure to keep a copy of your auto purchase document.
OUT-OF-TOWN TRAVEL: As you may or may not know, expenses of traveling away from home, overnight, on employment-related and/or continuing-education trips are generally deductible. Your home is considered to be the entire city or general area where your principal place of employment is located.
Out-of-town travel expenses include transportation, meals, lodging, tips, and a number of miscellaneous items. Specifically: airfare; car rental; parking; taxi; train; bus and subway; lodging (identify separately from meals); meals; bell captain; porter; laundry; bridge and highway tolls; telephone calls (including home); as well as any other ordinary and necessary expenses.
Document away-from-home expenses by noting: (1) the date; (2) destination; (3) and business purpose of the trip. Keep a detailed record of your expenses as you incur them. Always list meals and lodging separately in your records as different deduction rules apply to such expenses (i.e. meals are only 50% deductible). Receipts, generally must be acquired and retained to support each deductible business expense. However, if the business expense is less than $25 (raised to $50 for years after 1995), a receipt is not necessary if
you record all the information in a diary.
PROFESSIONAL FEES & DUES: Dues paid to professional societies related to your profession or business are deductible. Therefore do not forget to keep track, document and deduct your dues and fees paid to: associations; chamber of commerce; realty board; city business license; as well as any other organizations that are directly or indirectly related to your profession or business.
TELEPHONE EXPENSES: The basic local telephone service costs of the first telephone line provided in your residence are not deductible. However, toll calls from that line are deductible if the calls are business related. The costs (basic fee and toll calls) of a second line in your home or any other service are fully deductible, if used exclusively for business. Therefore do not forget to keep track, document and deduct the costs of your: fax transmissions; paging service; coin operated pay phone usage; telephone credit
card calls; cellular service and business related toll calls on your home phone.
OFFICE IN THE HOME: Should you qualify for this deduction then it is important that you document and keep track of the following expenses: business area of the home in comparison to the total area of the home; home mortgage interest expense; real estate property tax expense; homeowner's insurance cost; repairs and maintenance expenses that are directly and/or indirectly related to your home office; cost of household utilities such as gas, electricity, water, etc.
CONTINUING EDUCATION: Educational expenses are tax deductible under either of two conditions: (1) your employer requires the education in order for you to keep your job or rate of pay; or (2) the education maintains or improves skills in your profession. The Real Estate Professional typically takes courses to satisfy the second criteria. For some professionals, such as Realtors, brokers, contractors and some property managers, their basic licenses require them to take and/or pass continuing education courses on a
regular periodic bases. Should you qualify for this deduction then it is important that you document and keep track of the following expenses: correspondence course fees; school material, supplies and textbooks; and seminar fees.
BUSINESS SUPPLIES: All business professionals incur expenses that are ordinary and necessary in their normal course of work. If these expenses are not reimbursed by an employer or a client then they are generally tax deductible. The following are examples of ordinary and necessary business supplies: a briefcase; business cards; computer software and supplies; FAX supplies; film and processing; greeting cards; lock boxes, keys and locksmith; map books; photocopy expense; postage; shipping and freight; stationary and any
number of other office expenses.
MISCELLANEOUS BUSINESS EXPENSE: In addition to business supplies, most business professionals incur other miscellaneous business expenses that are ordinary and necessary in their normal course of work. If these expenses are not reimbursed by an employer or a client then they too are generally tax deductible. The following are examples of ordinary and necessary miscellaneous business expenses: advertising; signs, flags and banners; appraisal fees; attorney fees; bank charges; clerical services; computer database
subscription fees; courier service; equipment repair; finders fees; gifts and flowers; insurance premiums (i.e. Errors and Omission and Liability); legal and professional services; multiple listing services; open house expenses; referral fees; and repairs to sell listed property.
INTEREST: Mortgage interest on business personal and real property (other than a personal residence) and interest paid on borrowed funds used to pay for ordinary and necessary business expenses is generally tax deductible. The following are examples of ordinary and necessary interest expenses: credit card finance charges used to pay for qualified business expenses; line of credit interest expense used to pay for qualified business expenses; any other interest expense paid that can be traced to the Real Estate
MEALS AND ENTERTAINMENT: With the exception of Club Dues, any and all reasonable, necessary and ordinary meals and entertainment expenses sustained in the course of business are tax deductible subject to a 50% reduction. Examples of ordinary and necessary meals and entertainment expenses are: restaurants; shows; sporting events and theater.
EQUIPMENT PURCHASES: The costs of business assets which are expected to last longer than one year and that cost more than $100 are normally deducted differently on your tax return than are other recurring, everyday business expenses like business cards, office supplies, etc. Therefore it is important that the Real Estate Professional record expenditures to procure such assets separately. Examples of such assets are: answering machines; calculators; cameras; computer equipment; copy machine; FAX machine; pager;
recorder; and a telephone.
Although the above expense categories and examples are frequently used to offset income generated and/or gross receipts received, it is also very important that Real Estate Professionals be aware of other deductions that they can benefit from. It is especially important for the Real Estate Professional who materially participates in the operations of rental real estate to be aware that ever since 1994 they are no longer subject to the Passive Loss Rules. This means that they are no longer limited in their rental loss
deductions. The $25,000 deduction loss limit and the $100,000 to $150,000 phaseout of losses rules have been repealed for qualifying professionals!
4-Serenity, Inc. has the competence and experience to ensure you take advantage of all your deserved tax deductions. We specialize in real estate oriented accounting, tax planning, tax preparation and related services. We invite you to contact us with regard to your specific needs.