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There are three types of real estate deductions you need to track for your business. Today, we’re going to talk about the most common:  Property expenses. Check back over the next few weeks for the rest of the real estate deduction categories.

Property expenses.

These are the easiest to track. Property expenses are the costs that are associated with the property such as utilities, property tax, insurance, repairs and any other direct expense that goes with the property.

The biggest challenges for accounting and tax work will be handling the repair or improvement? Question, calculating interest and principal from the payments and proper allocation of the escrow account for property tax, PMI and insurance.

We’ll go into a little more detail on Repair or Improvement tomorrow.

Meanwhile, let’s look at the second possible challenge with property expense allocation. The principal and interest allocation is important because a principal pay-down reduces debt. It is not deductible. The interest is deductible.

If you are buying property with seller financing, the accounting can be a little harder.

If you’re buying through lease option or rent-to-own, the amount you pay is rent and currently deductible. If part of the payment is available for downpayment when/if you buy, than that part is coded as an asset.

If you are buying with the seller financing the entire purchase, then you will need to have an amortization schedule that shows how much goes to interest and how much goes to principal.

And finally, if the seller gave you an interest only note, and the entire payment is interest, then it is all-deductible.

The other accounting challenge for property expenses is the escrow account. The payments for escrow each month are prepaid expenses, which is an asset. It isn’t deductible at this point. But when a payment is made out of the escrow account for insurance, PMI, property tax or some other item, then that payment is deductible. Usually the lender controls the escrow account, so you need to rely on their often-inaccurate records for the details. (Or better yet, take matters into your own hands and find out how much was actually paid by checking property tax records, insurance policies, etc)

Make sure you check tomorrow’s article on Repairs vs. Improvements for another big challenge for real estate deduction calculation.

Thank you for choosing UsTaxAid Services, we would be glad to assist you with all of your tax needs and have you become our client. We can have a Client Representative get in contact with you or you can call Richard at 888-592-4769.

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