In case you weren’t aware of this, those who invest in property do so not just for the income that it fetches, but also for the tax breaks that are part of owning and renting property – essentially, owning and renting is a business in itself.
Most of the operating expense deductions stem from the money you might have spent on the property itself. These deductions in taxes are for mortgage interest along with property taxes and insurance deductions, repair on property, and maintenance. An expense that does not require any money to spend is depreciation on the property.
Depreciation is a great tool for the landlord since it enables a write off of the property owner’s biggest expense – the buying price for the rental property itself – by the way, this does not include the land. Additionally, depreciation also cuts your basis for estimating gain or loss, when you decide to sell or exchange your rental property.
In the case that you sell your property, you owe taxes on whatever profit you make on it.
If you’re worried about paying taxes while selling, consider exchanging it for a like-kind rental property.
All of these arrangements for rental properties imply that you have to be an active participant in managing your property, even if you have someone doing the paperwork for you – this means getting personally involved with approving terms of contracts, approving expenses toward maintenance, and interviewing new tenants.
Furthermore, tax credits are also offered for those who are willing to invest in low-income housing properties, especially old commercial structures. These tax credits can lead to a deduction on your tax bill directly.
These credits may range anywhere from 10% of your expenses to 90%. These tax breaks are incentives offered to investors who are interested in buying rundown buildings so that they can be fixed up. This prevents the building from further deterioration. Make sure to do some research, since the government has regulations about what kind of properties qualify for these incentives.
According to the IRS, landlords of rental properties are advised to keep a file of records of rent-related activities – this would include all invoices and receipts as well. This should be reported on Schedule E, Supplemental Income and Loss while filing your income tax. You can slash your tax preparation time by utilizing software like ‘Quicken Rental Property Manger’ or ‘Tenant Pro’ to help you maintain your records. This might also be less expensive than hiring a property manager as well.
Interestingly enough, with equities and mutual funds in a state of uncertainty amid the impending recession, investing in the rental property segment may prove to reveal more income prospects. This potential for income is not just from the revenue from renting, but it can also come in the way of tax advantages provided to property owners by Uncle Sam. If you have what it takes to invest some money and the time to build your income gradually, rental properties show lots of potential for future investors.