Owning a property is definitely both prestigious and advantageous, given the various tax deductions that are available, making it easy for you to file your returns. Investment property tax deductions are largely dependent on whether you have purchased the property for resale or for rental purposes. This is because tax handling of expenditures incurred in any type of property is different for resale and rental properties.
The first question that comes to mind when talking about tax deductions is the different types of expenditures that are deductible. Firstly, with respect to purchase costs of the property, it is important to understand that the cost is not deductible, irrespective of whether the property is bought for resale or rental purposes. In case of resale properties, this cost is deducted from the selling price to decide the exact tax gain or loss and in case of rentals, the cost is depreciated. Similarly, for improvements, refurbishments or renovations, the same rule is applied.
Mortgage interest on the property is another area, which follows a certain set of rules to determine whether or not it falls under investment property tax deductions. Where the property is being built or renovated and mortgage interest accrues, irrespective of whether the property is for resale or rent, the interest is not deducted but capitalized. However, in case of resale property, where the construction is complete, the interest becomes deductible. Similarly, after completion of construction, in case of rental property, the interest is deductible under rental property expenses. It is pertinent to note that this rule applies to real property taxes as well as insurance expenses.
It is equally important to note that maintenance of any property needs minor repairs, which are essential for keeping a property in good condition. Such expenditures are all included under investment property tax deductions. These also include expenses incurred for waxing floors, buffing carpets, repairing furnaces etc. These expenses fall as deductibles under Schedule A for resale properties and Schedule E for rental properties.
With respect to mileage and travel expenses, it is pertinent to note that these expenses, when incurred during construction, refurbishment or renovation period, are not deductible. However, when they are incurred for the general maintenance of the investment property after completion of construction or renovation, they will fall under deductibles in Schedule A or E, depending on whether it is resale property or rental property. Travel expenses for visiting the property, collecting rents, consulting professionals, picking up supplies etc, all fall under deductibles.
Legal and professional fees, advertising fees, office supplies and other supply costs are all included as deductibles, only after the construction, renovation or refurbishment of the investment property is finished. In case of these costs being incurred during the construction or renovation period, they are deducted from the main selling price to calculate tax gain or loss.
As far as depreciation is concerned, properties purchased for resale purposes cannot avail of this deduction. However, in case of rental properties, you can avail depreciation on all capitalized costs, except for the cost of the land.