Ownership of a rental property provides numerous advantages. One of the most compelling advantages of owning property is its ability to reduce one’s taxable income. The fact that rental properties fall between investments and companies makes them eligible for a wide range of tax advantages, including tax deferrals when exchanging rental assets.
Most property owners expect their investments to appreciate year after year. Mortgage payments, which enhance your equity ownership in the home, are a factor. Property values rise due to robust markets or increasing net operating income in rental properties. Since the Internal Revenue Service does not record capital gains until you sell the house, your income continues to grow as long as it is invested in the property.
Tax-Sheltered Cash Flow
Taxes on rental property income are solely required by the Internal Revenue Service (IRS). Your profit is the sum of your rental and non-rental income, less your expenses. It’s essential to keep in mind that your rental property costs include items like interest on your mortgage, real estate taxes, and management costs. Travel costs are often included in this category.
Spending a week in Hawaii working on your beach property, for example, would be deductible from your taxable income. A portion of your property’s initial price can be depreciated each year as a method of admitting that it will eventually depreciate. As long as you don’t spend anything to earn the depreciation deduction, it will assist reduce your tax bill by canceling out other income.
Deductions for inactive time
It’s not difficult to wind up with a taxable loss on your investment property with all the costs you might claim. Losses from a passive activity, such as investing, typically cannot be used to offset active income from a job. Renting a home might result in up to $25,000 in annual passive activity losses, which you can deduct from your regular income. As long as your modified adjusted gross income (MAGI) falls below $110,000, you can take advantage of the tax break. A person’s ability to deduct a loss from passive activity declines by $1 for every $2 in modified adjusted gross income above the threshold.
A tax-deferred exchange can be set up if you sell your investment property and then use the funds to buy another rental property, regardless of whether it is of a distinct type or in a different state. You can use your old property’s cost basis to offset the purchase price of your new one if you follow the IRS requirements. There are no capital gains or depreciation recapture taxes due on the exchange because the IRS does not consider this type of transaction a sale.
When you work with Tameka Manns Realty Group, you don’t have to worry about the day-to-day hassles of managing rental properties. We help our clients understand the tax advantages and laws of real estate investing so they can invest confidently.