Tax Deductions - Tax Write-offs for Income Property

Operating Expenses incurred via the operation and maintenance of an income producing property are tax deductible. Operating Expenses 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, miscellaneous supplies, telephone, trash removal, vehicle mileage expenses, utilities, etc.

Mortgage Interest paid on any loans secured by income property is tax deductible.

Loan 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 10 year term and you pay 2 points to obtain the loan, you can write off $200 a year over the 10 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 a property include title search fees, title insurance, appraisal fees, loan application fees and recording fees. All 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 requires that residential income properties must be depreciated over 27.5 years and commercial income properties over 39 years

Capital Improvements are subject to the same depreciation method as buildings. 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 including 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 years is usually used. Check with your accountant to determine the appropriate recovery period for a specific type of personal property.

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Determine the Real Estate Financial Statistics for a Property

Before you buy an investment property it is critical that you create your own projection of the property's profitability. Real-Estate-Proforma.com has a quick-proforma with which you can calculate real estate financial statistics such as Internal Rate of Return, Capitalization Rate, Cash-on-Cash, Debt Multiplier, Loan-to -Value Ratio, Debt Coverage Ratio, and Mortgage Payments. You can use this JavaScript proforma to project the profitability of a real estate project. By becoming a member you will receive access to a number of Excel real estate proformas. membership | services

If you are analyzing another person's proforma, or you are examining a prospectus for a real estate deal, it is very important that you read the document carefully and determine how the values of the financial statistics above are being calculated. For instance, values such as the Cap Rate may be determined from overly optimistic projections of the future rental income of a property.

You can "reverse engineer" the financial projections you receive from a prospectus and/or request the Excel (or other type of) spreadsheet a developer used to create their proforma. A very useful Excel or Visual Basic macro used to check Excel formulas is available in the spreadsheet below for download. Download Mortgage Formula Excel Spreadsheet

The due-diligence you do on a potential investment may uncover a number of potential problems with a real estate deal and we suggest you research each real estate investment very carefully. There are a variety of real estate financial consultants who can help with this, but if you are like many Real-Estate-Proforma.com members, you can or are learning to do your own due-diligence.

We hope you become a more successful real estate investor by using this site! membership | services