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Deductible Expenses for American Property Investments

IJ ZemelmanAug-30-2015

It’s not uncommon for US Expats living abroad to invest in property located in the United States.  If you’re a property investor, there are some available deductions of which you should be aware.

 

When the housing sector turns into a buyers’ market, many US Expats take the opportunity to capitalize on investment properties.  Investing in property can’t be accomplished without incurring a wide variety of expenses.  Fortunately, the IRS allows deductions for many of the expenses associated with property investments, thus allowing American Expats to reduce their overall tax liability.

 

Repairs which restore your investment property to its original condition are deductible.  It’s important to understand the difference between ‘repairs’ and ‘improvements,’ because home improvements are not deductible.

 

Repairs are defined by the IRS as work which restores the house to its original condition.  Improvements are classified as work which increases value and/or prolongs the life of any given property.  It’s important to understand the difference between these two, because only repairs are deductible from your US expat tax return.

 

The IRS allows a deduction of up to $5K for start-up expenses.  If your start-up costs total more than $5K, you can break the overage up into installments of the same amount to deduct from your US expat tax returns over the course of the next 15 years.

 

Opening a business requires an initial investment, and investing in rental properties is no different.  You are likely going to incur a variety of start-up expenses which you can deduct from your US expat tax return.  The IRS allows a maximum of $5K to be deducted in the first year of your start-up business.  If you spend more than $5K in start-up expenses, you can divide the overage into equal amounts and claim a deduction in that amount on your US expat tax return for the next 15 years.

 

Some examples of deductible start-up expenses include:

  • Minor home repairs which are required to make the property rentable,
  • Business license,
  • Required permits,
  • Required registrations,
  • Insurance premiums,
  • Home maintenance expenses,
  • Fees paid to professionals for business entity establishment

 

Mortgage interest is a deductible expense whether the mortgage was obtained to purchase a piece of investment property or to finance improvements and/or repairs.  Interest on credit cards do not qualify as mortgage interest and is not deductible.

 

If you take out a mortgage to purchase an investment home or to make repairs to an existing home, the mortgage interest is a deductible expense you can claim on your US expat tax return.  If you paid for the home or repair expenses on your credit card, you don’t qualify for a deduction; credit card interest is not a deductible expense.

 

If you invest in a property management company to take care of your investment property while you are overseas, you are able to deduct these expenses.

 

Many US Expats outsource the maintenance of their investment property to a property management firm.  If you hire professionals to monitor and maintain your investment property, you can deduct this outgoing expense on your US expat tax return.

 

If you conduct business from your home, you can deduct the portion of your monthly expenses that are used for business purposes.

 

If

  • your rental activities qualify as a business and
  • you use your home office exclusively for your rental business, and
  • you use your home office for rental business on a regular basis,

 

you can deduct certain monthly expenses on your US expat tax return.  You may deduct the portion of your rent or mortgage interest, taxes you pay, insurance, utilities, and the cost of your home internet.  The amount you exclude must be consistent with the percentage of your home that you use for business purposes.

In the past, the IRS took the position that landlords couldn’t take the home office deduction. However, the tax court has held that landlords who meet the above requirements may take the deduction, and landlords have successfully done so like other business owners.

 

US Expats who travel can deduct a portion of their travel expenses to minimize tax liability associated with investment properties.

 

If you spent money travelling to the United States to purchase your investment property (airfare, meals, etc.), these expenses are lumped with the purchase price of your property and depreciated over a 27.5 year period.

 

When it comes to travelling expenses for managing a piece of investment property, you can deduct the expenses which are directly related to your property management tasks.  For example, if you travel to the United States for 9 days and you spend the weekend visiting friends or family and the other 7 business days working on management of your property, you can deduct 78% of your expenses since the other 22% was classified as personal time.

 

Not all expenses are deductible, so it’s important to know what the IRS does not allow as a deduction on your US expat tax return.

 

There are a list of investment property expenses which are not deductible on your US expat tax return.  Some of them include:

  • The time you spend working on your property,
  • Federal income taxes,
  • Charitable donations made on behalf of your investment business,
  • Country club contributions.

 

If you have any questions about expenses which you can deduct from your US expat tax return to minimize your tax liability, you are encouraged to seek assistance from an experienced US expat tax professional.

 

Home ownership

 

There are a list of investment property expenses which are not deductible on your US expat tax return.  Some of them include:

The time you spend working on your property,

Federal income taxes,

Charitable donations made on behalf of your investment business,

Country club contributions.

 

If you have any questions about expenses which you can deduct from your US expat tax return to minimize your tax liability, you are encouraged to seek assistance from an experienced US expat tax professional.

 

 

Zemelman

 

I.J. Zemelman, EA is the founder of Taxes for Expats
She may be reached at: +1-646-397-2887
Email: questions@taxesforexpats.com
Web site: www.taxesforexpats.com