Real estate investment can be a profitable venture, particularly in thriving areas like Central Florida. However, maximizing your return on investment often hinges on understanding and utilizing available tax deductions.
We offer personalized and comprehensive tax solutions for U.S. and foreign investors. Here, we delve into some of the most significant tax deductions for real estate investors in Central Florida, covering both federal and state-specific opportunities.
Property Depreciation
One of real estate investors’ most significant tax benefits is the ability to depreciate property over time. The IRS allows you to deduct a portion of the property’s value each year, acknowledging that buildings and other improvements deteriorate over time.
For residential properties, the depreciation period is 27.5 years, while commercial properties are depreciated over 39 years. To calculate depreciation, you must determine the property’s basis, allocate it between the land (not depreciable) and the building, and use the IRS-prescribed method to figure annual deductions. Maximizing these deductions can significantly reduce taxable income, helping you retain more earnings.
Mortgage Interest Deduction
Mortgage interest is another substantial topic of tax deductions for real estate investors, offering significant relief on federal and state tax returns.
You can deduct the interest paid on loans used to acquire or improve your investment property. This can be a substantial deduction, especially in the early years of the mortgage when interest payments are higher. Furthermore, if refinancing your property, the interest on the new loan is also deductible as long as the loan is used to improve the property.
Repairs and Maintenance
Regular upkeep is essential for maintaining property value, and fortunately, the costs associated with repairs and maintenance can also be deducted.
Expenses related to necessary repairs that keep your property in good working condition — such as fixing a leaky roof or mending broken appliances — can be fully deducted in the year they are incurred. It’s important to differentiate between repairs and improvements; improvements that add to the property’s value or prolong its useful life must be capitalized and depreciated over time.
Property Taxes
State and local property taxes are also deductible expenses, providing another layer of tax relief for real estate investors.
In Central Florida, property tax rates vary by county, but these taxes are fully deductible on your federal tax return. Keeping accurate records of all taxes paid is crucial to ensure you receive the maximum deduction possible.
Qualified Business Income (QBI) Deduction
Under the Tax Cuts and Jobs Act, many real estate investors are eligible for the Qualified Business Income (QBI) deduction, which can significantly reduce taxable income.
QBI allows eligible owners of pass-through entities, like LLCs and S-Corporations, to deduct up to 20 percent of their qualified business income. This deduction is subject to limitations and phase-outs based on income levels and business types, but it represents a substantial tax-saving opportunity for many real estate investors.
Travel Expenses
If you actively manage your property, travel expenses related to the management can also be tax deductions for real estate investors.
Mileage for travel to and from the property, transportation costs, meals, and lodging can all be deducted when traveling for property-related purposes. It’s essential to maintain thorough records and receipts to substantiate these deductions.
Central Florida-Specific Opportunities
Beyond these federal deductions, investors in Central Florida can leverage additional state-specific opportunities to maximize tax benefits.
Florida does not have a state income tax, a significant advantage for real estate investors. However, it’s crucial to stay informed about local incentives and credits that may be available — such as energy-efficient improvement credits or other local initiatives aimed at promoting real estate investment in specific areas.
Navigating the complex landscape of tax deductions for real estate investors can be challenging. However, with the proper guidance, real estate investors can optimize their tax strategy to ensure maximum returns. At Harding Bell International, our team of experienced CPAs and advisors is dedicated to helping you make the most of these opportunities. Contact us today to learn more about how we can support your real estate investment journey in Central Florida.
