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The above article is intended to provide generalized financial information designed to educate a broad segment of the public it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
The Best Tax Benefits Of Real Estate Investing
What are the best investment property tax benefits?
Real estate continues to be one of the most popular investment strategies for protecting and growing ones wealth. Combined with the enticement of generating cash flow, investing in real estate also opens a treasure chest of tax advantages that renting does not. Uncle Sam can become an investors best friend as a slew of investment property tax benefits are available. The trick, however, is understanding whats available and how to capitalize on it.
Benefits Of Owning A Rental Property
The real estate market is seemingly filled with milk and honeyâespecially for those who know how to analyze real estate deals. If you have an eagle eye, youâll be cashing out big, and owning a rental property is just one of many ways to achieve this. While this may not be a walk in the park, a typical rental property owner knows it creates the best of outcomes.
Becoming a landlord in this day and age can happen with the snap of the finger with the rise of the Internet as there is always helpful information to guide you. From finding the right property and analyzing its current value, to screening tenants- all can be done in a simple and efficient manner.
Why Should You Buy A Rental Property
Rental property has excellent choices for you to earn a flexible amount of income. With homeownership rates at their most negligible levels in 50 years, this present time may be an excellent opportunity to investigate that open door. The way to progress as a fledgling rental property investor is by figuring out how to evaluate the worth of properties, picking the right area, understanding economic situations, and tracking down extraordinary occupants. If you meet these models, you can be more ready to receive the rewards of possessing rental property.
With tenant families developing at a faster rate than proprietor families, landowners are at the benefit in the rental market. With the ongoing investment capability of land, you should look hard and long at the advantages.
Talking To Clients About Rental Property Tax Deductions
When speaking with your clients about rental property tax deductions, there are a few key areas youll need to cover.
The goal of most real estate investors is to make money, so guiding clients to a property that makes sense for them is your primary role as a REALTOR®. And keep in mind that its always best to refer your clients to a tax professional to confirm how a rental property and eligible deductions will impact their financial situation.
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Which Rental Property Expenses Are Not Tax
Certain rental property expenses are not tax-deductible, including:
- Lost rent that came about because it wasnt paid or collected or because the property was vacant. However, if your client is on the accrual basis of accounting, and they included the rent in their income, it may be deductible.
- Personal expenses, such as the cost of commuting to and from work.
- Entertainment expenses.
- Political contributions.
- Fines and penalties.
You should always consult a tax professional about the specifics of tax deductions before you advise a client about claiming any rental property tax deductions.
The Tax Laws On Owning Rental Property
Owning rental property can be an excellent way to make extra income, supplement your mortgage payments and qualify for tax deductions. But the investment also comes with a slew of rules to follow at tax time. Understanding the tax laws on owning rental property can help speed the process and save you from expensive surprises.
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How To Calculate Depreciation On A Rental Property
Determining how much to depreciate each year isnt as easy as dividing your purchase price by 27.5. Instead, there are a few basic steps to follow:
How To Claim Your Rental Property Tax Deductions
To claim your rental property tax deductions, youll file the following forms with your regular annual tax return, which is Form 1040 or one of its variants:
- Use Schedule E to claim your rental property tax deductions.
- Use Form 4562 to claim depreciation for assets you place in service during the tax year.
- Use Form 4684 to report a casualty or theft loss involving your property.
Here are some of the documents youll need to keep to substantiate your deductions:
- Annual mortgage interest statements or monthly mortgage statements
- Property tax bills
- Detailed invoices for property improvements such as new appliances or a new roof
- Detailed repair and maintenance receipts and tenant requests for those items, when applicable
- Insurance bills
- Bank and credit card statements
- Invoices for professional services
- Copies of tenant leases
Tax deductions arent the only way to save money when you own rental property. To reduce your operating expenses, you may be able to refinance your rental property. With a lower interest rate, you can cut your monthly costs and free up cash for other things. Credible can help with this.
As an online mortgage broker, Credible allows you to easily compare personalized refinance rates. In just a few minutes, you can see loan details from all of our partner lenders and choose the best one for you. We also provide transparency into lender fees that other brokers typically dont.
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Transferring A Property You Already Own
It can be difficult to transfer a property you already own into an LLC. It is especially difficult to transfer a property into an LLC if you have an open mortgage on it. Transferring ownership to your LLC may be considered a formal ownership transfer, and you could lose your lower interest rates and more.
Phones Tablets Computers Phone Service Internet
Bought a new phone this year? Maybe a new laptop or tablet? If you use it for work, you can probably persuade your accountant that the costs should be deducted from your taxable income. Or, more likely depreciated, as most of these devices come with a lifespan that the IRS classifies in multiple years.
Likewise, for internet bills, phone service charges and the like, with the caveat that you need to be able to document that it was for business purposes. Printer toner, computer paper, pens, and the like keep those receipts.
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Can You Avoid Paying Tax On Rental Income
You cant avoid paying taxes, but with a good accountant, you can find legal deductions to reduce your tax bill. You can deduct expenses such as mortgage interest, insurance costs, advertising, payments to a property manager, and any legal or professional services required to maintain the property.
There is also a tax law called the Qualified Business Income Deduction. The QBI deduction allows individuals to deduct as much as 20% of their business income from their taxes if received through a pass-through entity such as an LLC. So, this can be another good way to reduce your tax obligations related to rental income.
Retire On Rental Income
No one says itâs all rosy owning a rental property, but the potential to retire on rental income gives a good feel about the market it is also a good source for passive income. You can own a rental property business for years, generate a high net worth and utilize the cash flow in supporting a retirement fundâor even pay off your mortgage with rental income.
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Tracking Income And Expenses To Maximize Your Deductibles
In order to file an accurate end-of-year tax return and make the most of the tax benefits of investing real estate, you will need to keep excellent records of all your income and expenses throughout the year. The best way to track and record your income and expenses is with purpose built software such as Landlord Studio.
With Landlord Studio you can:
- Track income and expenses in real-time so you never miss a deductible expense again.
- Instantly generate professional reports perfect for tax time.
- Gain insights into your propertyâs performance and create accurate forecasts and budgets.
- Track your mileage to make the most of your travel expense allowance.
- Prepare financial statements for your accounts, business partners and for your taxes.
- Easily digitize receipts and store them securely in our cloud server for future reference.
If your tax return is selected for an audit, you will need to provide all the required supporting documents. Having a system where you can keep everything well organized and easily accessible will help you avoid any potential additional taxes, penalties, and interest.
Additionally, Landlord Studio pairs these essential financial tracking features with a suite of property management tools designed to save you time and money, such as:
- Online rent collection for faster, more efficient and more secure rent collection.
- Manage and track leases, store documents
Which Property Is Depreciable
Not surprisingly, the IRS has specific rules regarding depreciation. You can depreciate a rental property only if all of the following statements are true:
- You own the property. As far as the IRS is concerned, you are the owner even if the property is subject to a debt.
- You use the property in your business or as an income-producing activity .
- The property has a determinable useful life, meaning its something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes.
- The property is expected to last at least one year.
You cant depreciate a rental property if you placed it in service and disposed of it in the same year.
Land is not depreciable because it never gets used up. Similarly, you cant depreciate the costs of clearing, planting, and landscaping, as these costs are tied to the land, not to buildings.
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Expenses Related To Starting A Business
Those who are just starting their rental business might be able to deduct a portion of their startup costs. Common startup costs include:
- Accounting fees
- The study of potential markets
- Training for new employees and salaries
- Office equipment and furniture
Although most startup costs are considered capital expenditures, property owners may be able to deduct up to $5,000 of those costs if they exceed $50,000. The remaining costs must be amortized over a period of time.
Take Advantage Of These Money
Do you own real estate that you rent out? Besides the potential for regular income and capital growth, real estate investments offer deductions that can reduce the income tax on your profits.
But first, consider what kind of real estate investor you are. Are you a passive investor or a real estate professional? Your classification as one or the other determines how your income and losses are treated.
Use Software Tools To Automate
Filing your tax return involves a lot of steps. You have to track income and expenses, create schedule E for 1040, create and send 1099 to contractors, fill out IRS Form 4562 to claim depreciation, and much more.
To simplify the process, here are a few resources that can automate reporting:
- Asset management and accounting software for real estate investors, including smart money management, automated income and expense tracking, personalized reporting and more.
- Strength: Accounting and Financial Tracking
- Accounting and property management tools to save time and money while managing your rentals. Track income and expenses, screen tenants, collect rent, and more.
- Strength: Accounting and Financial Tracking
- Designed to address the needs of DIY landlords as well as property management companies, Rentec Direct includes all the tools necessary to manage and rent your properties
- Strength: Complete Solution
Help Lower Costs With Strategic Deductions And Smartmove Tenant Background Checks
As a landlord, the complex rules of rental property tax deduction can often work in your favor. However, all your strategic hard work at tax time is meaningless if you sacrifice your profits to debilitating eviction proceedings. Help even the odds with in-depth tenant screening through SmartMove.
While working with finances, details always matter. One of most important renter screening tasks that a landlord should complete is to ensure that your applicant makes enough income to afford the rent. The industry standard for applicant income is three times gross monthly income compared to rent. Example: If the rent costs $1000 per month, then the applicant should make $3,000.
SmartMove can you help you to ensure that your applicant does make enough to satisfy your rental criteria for income. Our Income Insights report allows you to analyze applicant income in minutes. It compares your rental applicants self-reported income to actual financial data provided by TransUniona major credit agencyand recommends when you should request more income verification documentation. Ultimately, it helps landlords to save time and effort and lower risk of renter non-payment issues.
In the game of rental property management, dont let yourself get blocked into a corner. Increase your chance of success with thorough tenant screening through SmartMove.
Great reports. Great convenience. Great tenants.
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Get Resources To Manage And Grow Your Business
If you are a rental property owner, there are many different tax benefits you can take advantage of to reduce your taxable income. As a landlord, you should take the time to research specific tax benefits for the state in which you have a rental investment property.
With these strategies in mind, you can get more out of your investments as a landlord.
At Pine Financial Group, we can provide you with resources to help you learn more about the advantages of managing and growing your rental property business.
Want to grow your real estate business? Get financial assistance now for your real estate projects!
Pros And Cons Of Rental Property Accelerated Depreciation
The most significant advantage of accelerating depreciation is reducing an investors taxable net income. The paper loss created by depreciation can be used to offset other profits in the same tax year, such as dividend income from a private REIT like Roofstock One or net income from other rental property in an investors portfolio. Any remaining loss can be carried forward into future tax years and be used to offset future gains until the loss is exhausted.
One drawback to accelerated depreciation is that an investor needs to spend money on a cost segregation study to identify items that can be depreciated faster. The other disadvantage to depreciation is that it is recaptured and taxed when a rental property is sold. The maximum tax on recaptured depreciation is 25%, and the maximum tax on capital gains is 20%, depending on an investors income tax bracket.
The good news is that both capital gains tax and depreciation recapture tax can be deferred by conducting a 1031 exchange.
There are several rules the Internal Revenue Service has for 1031 tax-deferred exchanges, including strict time frames for identifying and purchasing a replacement property. The price of the replacement property and any mortgage balance must also be equal to or greater than the relinquished property, to avoid incurring a capital gains tax liability. Investors considering a 1031 exchange may wish to consult their tax advisor.