What deductions can you take as an owner of a rental property? If you receive rental income from the rental of a dwelling unit, there are certain rental expenses you may deduct on your tax return. There are several things you can do as a real estate investor to help manage your tax bill and maximize your after-tax return on investment. The property tax deduction can offset the rental income you must claim on your tax returns each year. There may be more deductions than you realize when you own rental properties as you can deduct mortgage interest and repairs. The IRS taxes real estate investors with income taxes and capital gains tax and an estate tax only applies to dead investors. In this blog, we will acquaint you with the basic terminology so you can be better prepared for a meeting with your tax adviser.

The IRS Treats Rental Income As Regular Income For Tax Purposes

This means you’ll need to add your rental income to any other income sources you may have when you file your taxes. Keep in mind that you may be able to deduct certain qualified expenses to decrease what you owe at the end of the year. Rental income is any payment you receive for the use or occupation of the property. Expenses of renting property can be deducted from your gross rental income. You generally deduct your rental expenses in the year you pay them. You cannot deduct capital investments like new buildings, additions, or renovations.

What Is Capital Gains Tax?

A capital gains tax is the tax on profits realized on the sale of a non-inventory asset. The definition is pretty simple: It’s the difference between what you paid for a capital asset (like bonds, mutual funds, real property, or stocks) and what you sold it for. The IRS taxes you on any net profits you get out of a property when you sell it. If you are flipping the property and you have owned it for less than a year, you pay short-term capital gains tax. If you hold the property for 12 months, you will qualify for more favorable long-term capital gains tax. Depending on your marginal income tax bracket, these taxes could range from 0% to 15%. On less than 1-year ownership you could pay 28% if you are in the 28% bracket.

Capital Gains Calculation

Determine your basis. This is generally the purchase price plus any commissions or fees paid.

  1. Determine your realized amount. This is the sale price minus any commissions or fees paid.
  2. Subtract your basis (what you paid) from the realized amount (how much you sold it for) to determine the difference.
    • If you sold your property for more than you paid, you have a capital gain.
    • If you sold your property for less than you paid, you have a capital loss.

If you have a deduction associated with the property, you can subtract it from your tax basis. If your adjusted tax basis is higher than your sale, you could have a capital loss. Capital losses can be used as deductions on the investor’s tax return, just as capital gains must be reported as income. Unlike capital gains, capital losses can be divided into three categories. Realized losses occur on the actual sale of the asset or investment. Unrealized losses are not reported. If you don’t have capital gains to offset the capital loss, you can use a capital loss as an offset to ordinary income, up to $3,000 per year. (If you have more than $3,000, it will be carried forward to future tax years.)

The Section 1031 Exchange For Real Estate Investors

A 1031 exchange is a real estate investing tool that allows investors to swap out an investment property for another and defer capital gains or losses or capital gains tax that you otherwise would have to pay at the time of sale. You can sell your property at a profit and roll your money over into another property within 60 days without having to pay capital gains taxes at all. This is a great advantage over investing in mutual funds, stocks, bonds, and other securities or collectibles.

What Is The Difference Between Depreciation And Amortization?

Amortization and depreciation are two methods of calculating the value of business assets over time. Amortization is the practice of spreading an intangible asset’s cost over that asset’s useful life. Depreciation is the expensing of a fixed asset as it is used to reflect its anticipated deterioration. If you have been wondering whether you can amortize your tangible asset, such as a rental property, the answer is no. You can only depreciate it. This is because amortization does not apply to tangible property, but the concept of depreciation does. Depreciation is the process of claiming a deduction to compensate you for the property’s decrease in value during the year. You can only depreciate investment property. For real estate, you must spread the depreciation out over 27.5 years.

What Are The Passive Loss Rules For A Rental Property?

Passive activity loss rules state that passive losses can be used only to offset passive income. A passive activity is one in which the taxpayer did not materially participate during the year in question. Common passive activity losses may stem from leasing equipment, real estate rentals, or limited partnerships. Congress implemented these rules in 1986 to eliminate tax loopholes and abusive tax shelters.

Property Taxes

Each county determines the property tax districts that will be in effect. All counties have a general county rate set by the fiscal court and a school district tax rate set by the local school board. Expect to pay property taxes to local and county governments each year. You can deduct property taxes against your rental income.

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About Lisa Marie Jones, Realtor

Your hometown realtor! Lisa helps buyers and sellers of Luxury homes in Broward, Palm Beach, & Martin Counties. You need a real estate agent that will be with you every step of the way. Lisa Jones has earned a reputation for being one of the top real estate agents in South Florida.
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