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December 18, 2023 | read

What Real Estate Business Expenses Are Tax Deductible?

Brandon Hall

Running a business is an expensive operation, and that’s doubly true for the real estate industry. Whether it’s for maintaining properties, meeting with potential buyers, or paying local fees related to property management, real estate companies spend a lot of money on their business. However, not every business-related expense can be deducted as a business expense from your taxes. Deduction issues are some of the most common mistakes that people make on their taxes, and it can come back to haunt them during an audit. Here are some tips from The Real Estate CPAs about what real estate business expenses are tax-deductible.

There are many things to consider when deciding if something is a valid business expense for tax purposes. As a starting point, there is a four-question test that an expense must pass before it can be considered for a deduction. Ask yourself if the expense is ordinary AND necessary. Something that ordinary may not be necessary, and something necessary may not be ordinary. For example, if you buy a guard dog to protect your business, the expense may be necessary, but it probably wouldn’t be considered ordinary during an audit.

Another thing to ask is if the expense is current. This factor doesn’t just relate to when the expense was made. This question also requires the business owner if the expense provides a benefit now, such as advertising, rather than a longer-term benefit that comes with a new roof Understanding how expenses will affect the business’s tax burden could affect their decision making. If you’re curious is this year a good time to make specific improvements, we can help you decide.

Just because you paid for something using your business account doesn’t necessarily mean that it’s a deductible business expense. Though it should go without saying, the expense in question must be directly related to your real estate activity. You can’t deduct the price of a vacation and declare it a research trip. Business owners will have to prove the expense is directly related to the business owner’s real estate portfolio.

Lastly, it’s crucial to make business expense deductions reasonable. You will have a hard time justifying that your company needed to have a Lamborghini as a company car. The expense doesn’t need to be that extreme to cause a problem. If you try to deduct $500 meals or pass off extravagant personal items as business expenses, the IRS is going to reject those deductions. Keep these limits in mind when making purchases.

Travel and education deductions are among the most commonly used by businesses, but it’s vital to deduct travel and transportation costs carefully. This caution applies to the costs associated with education and events as well. It’s critical to have a process that includes showing the reason why a particular educational or travel opportunity is necessary. These costs are often challenged under IRS audit, so be careful when deducting these costs and make sure you can substantiate them.

You can learn more about real estate taxes by looking at the Ultimate Guide to Tax Planning for Landlords and Buy & Hold Investors on our website. It contains a wealth of information that can help your business save money on their tax bill. And if you want someone to handle the heavy lifting for you, The Real Estate CPAs has high-trained tax staff members that can help you get the maximum deduction on your taxes.