Calculating investment property expenses

Investment property can be said to be real estate property that has been bought with the intention of earning return or making profit on the investment either through rental income, sale in the future or a combination of both. An investment property can be long term or short term (a case where real estate is bought, renovated and sold at a higher price for profit purpose).

An investment property is not the investor's primary residence but specifically acquired to generate income and profit from appreciation or to take advantage of some certain tax benefits.

INVESTMENT PROPERTY EXPENSE

Investment property expense therefore is the cost incurred from the day to day management of a property acquired for profit purposes. There are two basic types of investment property expenses, they include:

  • Current Expenses

  • Capital Expenses

Current Expenses are general items purchased to help in keeping the property in good working condition as well as habitable. Current expenses can be deducted from taxes same year they were incurred hence the name “current expense”. It reoccurs after a short period of time. For an expense to be classified as a current expense, it has to be ordinary and necessary.

Simply put, current expenses cost lesser money to fix and have more short term value than long term. Example is fixing of broken louvers, electricity bills, repairing of wooden doors etc.

Capital expenses are expenses that give lasting advantage or benefit to the property. Renovations, remodeling and expenses that extend the life of a property beyond its original condition can be classified under capital expenses.

HOW TO APPLY IT TO INVESTMENT

Since these expenses are incurred on management of a property, they can be effectively subtracted from the investment profit as expenses. While expenses made towards management of a property should be deducted, not all expenses can be deducted. There are a list of deductible expenses that should be removed from the profit from the investment and a list of expenses that should not be deducted.

Expenses like money used for advertising the property, insurance money on the property, legal, accounting and other professional fees, travel expenses from supervising the property, maintenance and repairs done on the property, etc can be deducted as expenses because they are all towards the improvement of the property for profit making purpose. But expenses like vacation or luxurious lodging during work, value of your own labor, personal portion of expenses, land transfer taxes, etc are not deductible expenses because they in no way contribute to improving the quality of the property.

Investors should be able to know or have the knowledge about what investment property expense is, whether an expense is a capital or current one and whether it should be deductible or not to be able to effectively manage their property, do the necessary calculations involved and get the accurate return on investment for the property.

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

Start Trading
Follow us in social networks!
Live Chat
Leave feedback