Architects work hard for their money, but why work so hard to turn around and give that money away to the government? A great way for architects to work toward gaining long term wealth is a natural offshoot of the current career – real estate. Real estate is widely believed to have created more millionaires in America than any other industry. Real estate is also one of the most beneficial industries in terms of tax benefits. In this article, we will discuss the tax advantages that architect entrepreneurs, aka Archipreneurs, can take advantage of by landlording.
Interest – One of the greatest expenses that is deductible for landlords is interest payments. The interest paid on loans for mortgages, the interest on loans for property improvements, and credit card interest that was used for the purpose of purchasing goods and services for those items used in rental real estate activities are deductible. If you are a landlord who earns more than $25 million from rental real estate activities, these deductions were majorly curbed by the 2018 Tax Cuts and Jobs Act. But, then again, if you earn more than $25 million in rental real estate income you probably aren’t reading this article anyway.
Depreciation – The Internal Revenue Service (IRS) does not allow a landlord to deduct the actual cost of purchasing rental property in the year in which the parcel was purchased. Instead, the IRS has a calculation whereby the landlord can deduct that cost over a period of 27.5 years. While the property is not actually depreciating in value (in most cases), the government created this provision to help landlords turn a profit.
“Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1.” – Warren Buffet
Repairs – Reasonable repairs to rental property are able to be deducted in the year that the repairs are made. Repainting, plumbing repairs and upgrades, gutter installation or repairs, flooring replacement, etc. are all examples of these ordinary and necessary repairs that will likely apply.
Pass-Through Tax Deductions – The Tax Cuts and Jobs Act, enacted in 2018, allows many landlords to qualify for a new special income tax deduction. Subject to personal income limitations, landlords have the ability to deduct 1) up to a maximum of 20% of income received from rental activity, or 2) 2.5% of the initial cost of the property used in rental undertakings plus 25% of that dollar amount paid to person of their employ. Unless extended, this deduction has an expiration date after the year 2025.
Travel – When a landlord has to travel to their rental property to investigate a complaint by a tenant or go to the store to get a faucet for that property, these travels are considered travel expenses that are deductible. When actually traveling to the property to perform the repair, these travel expenses must instead be added to the tax basis of the property and will be deducted over a period of years.
If the landlord drives a truck, SUV, van or other vehicle for rental activities, two options exist for vehicle expense deductions.
-deduct the repairs to the vehicle, gasoline, actual mileage, etc.
-utilize the standard mileage rate as per the current IRS rates (qualification requires that car usage for rental activities are done in the first year of ownership of the car)
Overnight travel, airfare, meals, etc. are also available to be deductible expenses. With some diligence and careful planning, these business travels may also be able to be mixed with pleasure. Very meticulous record keeping must occur as these deductions are heavily scrutinized by the IRS.
Home Office and Insurance – Keeping in mind certain requirements that must be minimally achieved, expenses for a home office having the ability to be deducted from taxable income. While office space in the home that is designed for office work applies, a lesser-known deduction is also possible for a workshop that is dedicated for use in the rental business.
The premiums for nearly all insurance purchased for the rental business are deductible. Insurance for flood, fire, homeowners, etc. are generally included as qualifying. If workers’ compensation or health insurance is paid for employees, these insurance premiums are also deductible.
Taxes may be inevitable but finding a way to create long term wealth and save on taxes is a great strategy for the savvy Archipreneur. You work hard; let your money work hard for you. Stay tuned to The Wealthy Architect for more tips and tricks to successfully build your financial house.
