As a landlord, you probably already know that taxes are inevitable, but that doesn’t mean you can’t cut them down and keep your hard-earned money. The IRS can be your friend who gives you their notes before the audit or the bully who takes your lunch money. It’s all about how you use the tax code to your advantage. Here’s a little guide on how to play the tax game without paying a penny more than necessary.
Tax Benefits of Rental Properties
First, depreciation is your best friend. The IRS allows you to deduct depreciation on your property over 27.5 years. So, while your house may be worth a lot, on paper, it “depreciates,” dramatically reducing your taxable income. Next, we have deductible operating expenses like insurance, taxes, and more that can significantly reduce your tax bill. Finally, there is capital gains tax relief available when you hold your property for more than one year, which you may qualify for.
Another tip: If you’re planning to sell your rental property, a 1031 exchange is your golden ticket. This allows you to reinvest the proceeds of the sale in another rental property and defer paying capital gains tax. It’s like suppressing tax breaks while growing your real estate empire.
How is Rent Charged for a Loan?
Next, if you have a mortgage, you’re in luck. The interest you pay is fully deductible. Think of it this way: every time you make that monthly payment, part of it goes towards reducing your tax bill. And if you use part of your property as your primary residence and rent out the rest, you can even deduct interest on the rental portion. Unfortunately, principal payments are not tax deductible.
6 Tips to Reduce Your Rent Tax
Responsible Management
One of the least known tricks is actively managing your site. According to the IRS, if you spend at least 750 hours a year to manage your rent, they consider it “active” income instead of passive. This classification opens up more deductions, which means more money stays in your pocket. The more involved you are in the maintenance of your property, the greater the tax benefits. There are several factors to consider is considered valid, so talk to Investor friendly CPA learning the ins and outs of fitness.
Track and Deduct All Expenses
Keep a detailed list of all expenses associated with your rental. We talk about everything from new materials to marketing costs and travel expenses. Even the kilometers you drive to and from the location are deducted. You miss a deduction, and you could be cashing out the window. Even HOA fees you may pay are deductible. Finally, we can benefit from them telling us that our trash cans are empty an hour too early.
Reduce Investment Fees
If you did anywhere big-ticket upgrades like installing a new HVAC system or installing a new roof, you can lower their cost over time. Depreciation causes the natural decline in the value of goods over time. Keeping your property, and is the IRS rewarding you for it? That’s a rare win for both of us.
Do Borrow Your Friend
If you take out a loan or line of credit with your lease, the interest is deductible, too. Another win-win: you get cash to improve your site, again you get to reduce your tax liability. Be careful not to go overboard—too much debt can limit your financial options down the road.
Reduce Capital Gains Tax
Now, If you’re planning to sell the property, prepare for a hefty capital gains tax, but don’t worry—there are ways to soften the blow. If the property was your primary residence for at least two of the last five years before the sale, you can deduct up to $250,000 ($500,000 for married couples) in capital gains. For those who think long-term, careful estate planning can help postpone and eliminate capital gains taxes when you pass properties on to your heirs. It sells your property or giving it away to a family member will result in income tax. The tax rules are in our favor, however, if it is a gift of property.
Review your property tax assessment always
Overassessed properties mean overpayment of taxes. Compare your property’s assessed value to similar ones in your area, and if it looks unappealing, contest the assessment. You’d be surprised how often tax audits are more frequent than they should be. The process for appealing property taxes varies by location, therefore make sure that familiarize yourself with the deadlines and procedures required. There are even companies that will do all the work for you in return for a percentage of the money they saved if you are confused by the process or don’t have time.
Managing rental properties is a complicated business, and taxes are one of the balls in the air. But with these tips, you can reduce your tax liability and keep your investment profitable. If all these deductions and tax tricks sound amazingdon’t sweat it. Software like They left each other it can help you stay organized. It makes bookkeeping and even rent collection easier it helps you itemize all those deductible expenses, so you don’t have to settle at tax time. Take it from me, the guy who used to use it not sitting well and will turn on panic mode each tax season.
These are just a few of techniques to remember, and to consult regularly with tax professional who works with investors. Every deduction is a step towards paying less and keeping more of your rental income, ie indeed how do you want to play the game.
A Note About BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BiggerPockets.
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