While there are many upsides to investing in real estate compared to other investment vehicles, the ability to take tax deductions on your investment is one of the main reasons real estate investing is so attractive. Investing your hard-earned dollars into rental properties will allow you to realize returns on the investment both in current cash flow and over the long-term and take advantage of several tax benefits that further enhance your long-term growth potential.
So read on as we explore what real estate investors need to know about rental income and their taxes.
One of the first things real estate investors need to know about rental income and their taxes is to follow a system to organize your records so that filing at tax time can be as simple as possible. In addition, you may gain more by itemized deductions. A financial adviser can help you determine the best strategy for your specific real estate investments and help you zero in on which receipts are essential to keep for a suggested period of seven years. Any lease agreements and applications, as well as inquiries, should be held as well. Finally, retain separate records for each property, including documents that prove your rental income, expenses, and the documentation to support both.
Depreciation which allows you to recover the costs of maintaining a structure is a deduction that can be taken only for rental properties and is another beneficial deduction that real estate investors need to know about when looking at the potential rental income and their taxes. The condition of the building will erode over time, so too will the value of the structure. Investors are allowed a specific period for these deductions depending on the type of structure. For residential rentals, the period is 27.5 years which is considered the useful lifespan of the property. The deduction is divided over the years that the property serves as a rental or you’ve recouped the investment cost, whichever comes first. When you deduct your expenses from your rental income, you can subtract your depreciation before multiplying by the tax rate, providing significant savings.
Mortgage Interest Deduction
Whether it is the original mortgage or secondary for making qualifying repairs to a residential rental property, the deductions for the interest on the loan can add up to significant amounts and an essential tax deduction that real estate investors need to know about for their rental income. In addition, unsecured loans, or loans without collateral, used to purchase the rental property are deductible. Finally, the interest on credit card interest qualifies for a deduction if used for your real estate investment business.
Insurance, Property Taxes, HOA
Another write-off that real estate investors need to know about for their rental income and taxes are insurance premiums on the property. In addition, should you have employees on which you carry health insurance, there are further tax deductions for which you will qualify. Additionally, property taxes for your rental property are also deductible if not paid into an escrow account with a conventional loan, which would not be deductible. Finally, if your rental is in a community with an HOA, Homeowners Association, any fees paid are also deductible.
real estate investors need to know about writing off property taxes the tenants do not pay or utility services they provide for their tenants, realizing even further savings on rental income and taxes.
Legal and Professional Fees
When conducting a real estate investment business, the need arises for legal counsel or a CPA or computer software to prepare your taxes, or perhaps a real estate agent who will charge commissions. real estate investors should also be aware of the deductions for these and other qualifying fees on rental income and their taxes.
Repairs, Maintenance, and Cleanings
While improvements to the property provide tax benefits through depreciation, real estate investors need to know that they can also deduct repairs, maintenance, and any charges for cleaning their rental properties from their rental income.
Office Space, Travel
real estate investors should know that office space and equipment used for your investment business are deductions. In addition, if you must travel a great distance in the conduction of your real estate investment business, these expenses are also deductible within the given guidelines.
real estate investors should also know about using 1031 exchanges to defer capital gains on swapping one rental income property for another.
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