5 Tax Benefits of Becoming a Landlord
Deducting Interest and Property Taxes
No matter what kind of real estate business you are in, you can deduct all of the mortgage interest and property taxes paid on your investment properties, just like you do for your personal residence. The lender will send you a Form 1098 with amount of interest paid.
What Rental Property Deductions Can you Claim?
When you sell an investment property, your net profit is subject to capital gains tax. If you owned the property for over a year, you'll pay the lower long-term capital gains tax rates, and if you owned it for one year or less, your profits will be taxed as ordinary income.
The main tax benefit of owning a house is that the imputed rental income homeowners receive is not taxed. ... It is a form of income that is not taxed. Homeowners may deduct both mortgage interest and property tax payments as well as certain other expenses from their federal income tax if they itemize their deductions.
Rental properties are great because you can borrow the bank's or someone else's money to increase the potential return. This is known as leverage. ... Rental properties allow me to buy large properties for far less cash than I might need to purchase stocks or other investments.
Those write-offs reduce your tax liability on other sources of income. ... But if you need an actual income property, it may be better if you pay off the mortgage. For example, let's say that you have a $100,000 mortgage on the rental property. By paying it off, you'll have an actual cash income of $800 per month.
These loan costs can often be claimed for investment properties, with tax deductions available for things like loan establishment fees, account management fees, mortgage insurance fees, mortgage registration, mortgage broker fees and stamp duty on the loan (not the property).
For some reason best known to the tax authorities, residential investment property is specified to wear down in 27.5 years. So, while you cannot deduct the full cost of the building in the year in which you bought it, you can deduct a portion of the purchase cost each year over 27.5 years.
6 things you can claim to maximise your tax savings
Repair Versus Improvement
According to IRS publication 527, any expense that increases the capacity, strength or quality of your property is an improvement. New wall-to-wall carpeting falls under this category. Merely replacing a single carpet that is beyond its useful life likely is a deductible repair.
Fix and maintain
Another way to save tax is to spend on repairs & maintenance – not assets or major upgrades, just general wear and tear maintenance. The way this works is say you've got a profit of $3,000 from your rental for the year – the tax on this could be up to $1,000 that you'd have to pay to IRD.
Yet No Comments