| If you hold property for the production of income, you know that these investments generate not only income but also expenses. Fortunately, the Internal Revenue Code permits you to deduct those expenses (with certain limitations) if they are ordinary and necessary for the production or collection of income or for the management of property held for the purpose of producing income. In order to be deductible, the expenses must be directly related to the income or income-producing property, and the income must be taxable to you. In addition, you must itemize deductions on your tax return. In general, these deductible expenses of producing income will be subject to the 2 percent limit applicable to all miscellaneous deductions. In other words, you will be able to deduct only those investment expenses (other than interest, which is handled separately) that exceed 2 percent of your adjusted gross income.
The following is a list of investment expenses that are generally deductible in the production of income:
- Attorney or accounting fees.
- Automatic investment service and dividend reinvestment plan fees.
- Clerical help.
- Office rent.
- Cost of premiums for an indemnity bond posted to replace taxable securities that have been mislaid, stolen, or destroyed.
- Fees to collect income.
- Investment counsel and advice.
- Safe deposit box rental fees. If the box is used to store both taxable and nontaxable incoming producing documents, only a portion of the fee is deductible.
- Trustee's commission for revocable trusts if the income is distributed to you. However, if the trustee is paid to manage property that results in tax-exempt income, the commissions are not deductible.
- Your share of investment expenses from a pass-through entity such as a partnership, S corporation, real estate mortgage investment conduit, or a mutual fund.
Certain expenses relating to the production of income are not deductible. These include:
- Fees paid to a broker to buy or sell investment property such as stocks or bonds. Commissions paid to acquire property increase its basis, while fees paid to sell property are used only to calculate gain or loss from the sale.
- State and local transfer taxes. If these taxes are paid to buy securities, they increase the basis. If they are paid when you sell securities, they are treated as a reduction in the amount realized on the sale.
- Transportation and other expenses paid to attend stockholders' meetings.
- Investment related seminars.
- Interest on money borrowed to buy or carry a single-premium life insurance, endowment, or annuity contract.
- Expenses incurred to produce tax-exempt income. In addition, you cannot deduct interest on money borrowed to buy tax-exempt securities or mutual funds that distributes only exempt-interest dividends.
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