Tax Advantages Of Buying And Renting Real Estate
Each year, there are millions of landlords who wind up paying more taxes from their rental income than is really necessary. Are you worried you might be among them? If you aren’t taking advantage of all the various real estate tax deductions available to you as a rental property owner, then you might just be. Rental real estate simply has more tax benefits than nearly any other kind of investment. Keep reading the learn some of the tax advantages of buying and renting real estate.
For most property owners or landlords, interest is the one deductible expense that outweighs the rest. Frequent instances of interest which you might deduct include things like mortgage interest payments on your loans that are used for the acquisition or improvement of rental property and any interest on your credit cards used for services and goods towards rental activity. Interest deductions were recently limited for landlords earning over $25 million from any rentals they own, although this limit can be avoided if property owners have their rental property depreciate over a span of 30 years rather than 27.5.
Depreciation is a second category of potential tax deductions. The actual cost of an apartment building, home, or other type of rental property isn’t fully deductible the same year that you pay for it. Rather, you can get back the cost of your real estate thanks to depreciation. This lets you deduct portions of the property cost over numerous years.
Repairs are a third potential deduction, since they can be fully deductible in the same year they happen. They do need to be necessary, ordinary, and reasonable in their amounts. Frequent examples include repainting, replacing broken windows, plastering, and fixing leaks, floors, or guttering.
Personal Property Deduction
Personal property is another potential tax deduction. If you have any personal property that’s used for rental activities, you can typically apply the de mimimis safe harbor deduction in a single year, which applies to property valued up to $2,000. The 100-percent bonus depreciation technique is another possibility, and it will still be in place until 2022. Common examples could include furniture or appliances used in rental units or just lawn and garden equipment.
Pass-through and Special Income Tax Deductions
There is a temporary option known as the pass-through tax deduction. Many landlords and real estate managers might qualify for this as a special income tax deduction more than a rental deduction. Based on your income, you might be able to do one of two things. First of all, you might can possibly deduct as much as 20 percent of your net rental income. Alternatively, you might be able to deduct 2.5 percent of the initial price of your rental property as well as 25 percent of whatever you pay your employees. Without further action from Congress, this deduction, at the time of writing, is scheduled to expire between 2025 and 2026.
Two possible tax deductions that you can maybe take on top of the rest can get a bit tricky, and they’re both ones that the IRS audits closely. They scrutinize deductions for home office use or traveling landlords since many taxpayers fudge their numbers for these categories. It’s best to only try these if you have copious receipts and documentation, as well as a tax professional you trust thoroughly.
If you hire independent contractors or employees to perform services related to your rental activities, you can typically deduct their wages and earnings as a rental business expense. Independent contractors might be repair professionals, and employees might be resident managers.
Insurance premiums are something you can deduct for nearly all kinds of policies that relate to your rental activities. These can include policies covering theft, fires, floods, and landlord liability insurance.
Now that you’ve read all this content, you know some of the many tax advantages of renting and buying real estate. If you already own property, make sure that you’re taking advantage of any that might apply to you. Also use any of the ones that you can when you buy property in the future with the intention of renting out to tenants.
Keep in mind that most of the tax deductions listed here are federal in nature. Depending on where you live, you might have other deductions, benefits, credits, and breaks available to you from your municipal, local, or state governments.