How to Calculate Investment Property Tax Deductions and Credits for the Real Estate License Exam

By John A. Yoegel

A tax deduction is something you may see on the Real Estate License Exam that you can deduct from an investment property’s income to reduce your taxes. A tax credit is something you can deduct from the taxes you owe. The federal and sometimes state governments create programs that permit tax credits or deductions to encourage certain activities with respect to investment properties.

Historic preservation and energy efficiency are the kinds of things the government periodically tries to encourage. Within certain limits, property owners are permitted to deduct the interest payments on their mortgage loans and local property taxes.

All things being equal, a tax credit is worth more in tax savings than a tax deduction. The credit is subtracted from taxes owed, and the deduction is subtracted from the net taxable income (your gross income after expenses). Most likely, the test will ask that question: Which is more valuable?

Last year the government said you could deduct $3,000 for work you did that increased the energy efficiency of your property. This year the government said you could take a $3,000 tax credit if you did the same kind of work. If the net income of your building is $30,000 in each of those years, and you’re in the 20 percent tax bracket, in which year are you better off?

Last year:

$30,000 (net income) – $3,000 (energy tax deduction) = $27,000 (net taxable income)

$27,000 (net taxable income) x 0.20 (tax rate) = $5,400 (taxes owed)

This year:

$30,000 (net income) x 0.20 (tax rate) = $6,000 (taxes)

$6,000 (taxes) – $3,000 (energy tax credit) = $3,000 (taxes owed)