Are you a landlord or real estate investor who pays too much in taxes? Most rental property owners already have experience owning their own homes or other business. They might be surprised by how many tax deductions and other actions they can take to reduce the tax burden for investment property like rental property.
Taxes for Rental Property Owners
It’s a good idea to start with an understanding of how your rental property taxes are assessed. Generally, taxes are levied against literally any type of income you earn from having that rental property. This income includes monthly rent, services, work done instead of rent, and repair expenses paid for by tenants.
Strategies to Reduce Taxes on Rental Property
Deducting Expense Cost Claims
Several expenses may be claimed on your taxes. There are many expenses and costs directly related to marketing and maintaining your property to stay in business. Just about all of them are tax-deductible. Rental property owners are often big winners at the end of the tax season. The list of deductible expenses can include utilities, insurance, professional services fees, marketing costs, and repairs and maintenance.
Trading Up to Avoid Capital Gains
Trading up is a way to avoid paying capital gains taxes for property that greatly appreciates with time. If you want to sell a home or vehicle or other collectibles that have appreciated, you will have to pay a large chunk of the appreciation in taxes. You achieve deferment of those taxes by trading that particular property for something more substantial. Always check your local states to confirm this is true in your area.
Investors Stay Active
Don't take a laissez-faire approach to your rental by being passive. If you want to be able to deduct more than just "losses," you need to show the IRS that you are at least spending 750 hours per year in a professional rental position regarding your property. This could include activities in buying, selling, renting, and managing your property. If there is no other job that you spend the same or more hours each year, you can have access to unlimited deductions.
When used accurately, you can claim depreciation or loss of value in rental assets over time. This doesn't apply to the actual land you own, but the structure value will depreciate over time. You may subtract the value of the land from the total purchase price to find the value of the structure. Every year you can depreciate the value of that structure based on the original purchase value for the length of time that the IRS sets for valuation. For a property structure, that is 27.5 years. Divide the value of the structure by 27.5 to determine the amount.
Take great care to keep accurate records throughout the year, and don't underestimate the importance of getting the maximum amount of deductions for all of your expenses. It can mean the difference in owing more or getting payback at the end of the year. Myrick CPA is here to answer all of your tax questions.
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