Zillow real estate investment writer and long-term investor Leonard Baron, MBA, is answering questions from MintLife readers.
If you have a question about investment properties, cash flows, insurance, mortgage financing, homeowners associations, renting versus owning, foreclosures and more, drop Leonard an email.
Rental Property Tax Deductions
Martha of WA asks:
I’m a newby investor and need to prepare a rental property Schedule E this year with my taxes.
I know I cannot deduct homeowners association (HOA) fees from my income on a personal residence, but can I deduct them since it’s a rental property?
Answer: Yes, you can! For a personal residence, you can generally only deduct mortgage interest and property taxes against your income – subject to Schedule A. But, rental properties are very different.
A rental property is a business similar to any other business.
If you are receiving revenues – in this case, rental income – you can deduct any expenses against that income that are “ordinary and necessary” in the operation of your rental property business.
There are a lot of expenses you can deduct in addition to HOA fees. A few typical ones are mortgage interest, property taxes, insurance, maintenance, repairs, equipment and tools used in your business.
You may be able to deduct a portion of travel expenses if your property is out of town. Rental property depreciation can also be a very large deduction.
Risk in Real Estate Investments
Ele of Camden, NJ asks:
I’m retired and have a few hundred thousand dollars in savings but am earning almost nothing in bank certificates of deposit (CDs).
I’m thinking of buying some real estate to get higher yields, but I’m a little concerned because I can’t risk losing my money.
Answer: You cannot compare investing you money in a bank account to investing in real estate.
The reason a bank CD pays so little interest is because it is very liquid and virtually risk free. That means it is highly unlikely you will lose your money.
Real estate, on the other hand, has its risks and benefits. The more risk you take, the more you stand to gain or potentially lose.
People can lose all of their money on real estate deals.
If you can’t risk losing your money, don’t buy real estate.
However, you might consider consulting a chartered financial analyst (CFA) or other financial advisor for the proper asset allocation of your retirement funds.
They can advise you about how to earn a little more money without taking too much risk.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow or Mint.com.
Leonard Baron, MBA, CPA, is Zillow’s real estate investment writer, a San Diego University lecturer and real estate due diligence expert. As America’s Real Estate Professor®, his unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions.