If you are building a real estate portfolio or house hacking, then you are essentially running your own small business. With that, you have the opportunity to write off your offsetting expenses from your business income.
It is important to take advantage of the opportunity to record your offsetting costs. With careful documentation, you can lower your overall tax bill and leave more room in your budget to invest.
We will take a closer look at exactly what offsetting costs are and why you should be tracking them.
How to offset costs?
When you run a business of any kind, you are able to write off some of your expenses. These expenses are a necessary part of maintaining your business, so they need to be recorded and used to offset your total revenue. After you subtract your offsetting costs from your total revenue, you’ll arrive at your profits. Since your profits are taxable, when you include offsetting costs you’ll effectively lower your tax bill. With that, you’ll have more money in your budget to invest in your future.
If you are investing in real estate, you are running a business. Your real estate portfolio might include investment properties or a house hack at your current residence. Either way, it is important to take note of your expenses and consider them as offsetting costs.
Offsetting costs that you should track
If you aren’t sure what expenses will qualify as offsetting costs, think about anything that you have to buy in order to keep your business running.
Here are a few examples to help you start thinking about your offsetting costs:
- Home office. Do you run your business from a home office? Think of a fair market price for the use of that space.
- Cell phone. If you make work calls on your cell phone, then you can include it.
- Car mileage and fuel. Running around town for your business is definitely an offsetting cost.
- Printing. Any materials you print or buy for your business should be included.
- Necessary repairs. The costs you incur for maintaining your properties could be a major part of your portfolio.
- Education expenses. If you take a course to improve your real estate knowledge, that is a business expense.
These are just a few offsetting costs that you might find in your business. Take a closer look at your own real estate portfolio to find all of your offsetting costs.
Why are offsetting expenses important to track?
It is extremely easy to overlook your offsetting expenses. However, it is important to track them because you can write them off of your business income. When you are able to write off valid expenses, you’ll be able to lower your tax bill which can boost your overall bottom line.
Since tracking your offsetting expenses can help your bottom line, why wouldn’t you choose to track them?
It isn’t too difficult to track your business expenses. You can choose to work with budgeting software like Quicken or Freshbooks to manage these expenses. However, the old school method of a simple spreadsheet will work as well.
The most important thing is to keep a running record of your expenses. Make sure to maintain a copy of your receipts. You can choose to hold onto paper copies or simply create a folder of scanned receipts. The digital record might be a better option because you’ll have everything you need in an easily accessible place. Hopefully, you’ll never need to prove these offsetting costs. However, it is better to stay on the safe side and keep comprehensive records.
The bottom line
The bottom line is that you should absolutely track your business expenses. Make sure to record these expenses and include them as offsetting costs. You can potentially lower your tax liabilities and allow more room for investing in your budget.
Take stock of your business today and determine what costs should definitely be included as offsetting costs.
If you have specific questions about a particular offsetting cost, then consider consulting a tax professional. They can help you determine what qualifies as an offsetting cost in your business if you aren’t sure.