Whether you want to be an owner or you fell into it because you had the vacant property you could not or did not sell, own rental property is a source of income and it affects your tax return.
Know the rules can help you maximize the tax benefits of owning rental property and help you create a strategy to help reduce or defer a portion of your taxes.
The tax advantages of owning rental real estate
If you have read "get rich" real estate books, a common theme is that the rental property can help you save on taxes
key is capital cost allowance - .. a deduction you can take for a percentage of your base in rental properties each year
When you sell the property, all depreciation deductions have reduced your basis in your home. Your profit when you sell is equal to your selling price, minus your adjusted basis.
You get the tax benefits of depreciation deductions while you own the property, but when you sell, you pay generally tax on the gain you would have had, plus all these depreciation deductions you took.
If you think you will not take depreciation allowances in order not to have to take when you sell, forget it.
IRS requires you to adjust your basis for your depreciation deductions or the amount of depreciation that you could deduct.
Although depreciation deductions essentially push some tax liability for future years is not bad at all. The longer you keep your money, plus it can work for you.
If you can control when you sell a rental property, you might be able to sell in a year when you are in a lower tax bracket, or when you sell other assets at a loss .
Beware of the passive activity rules and risk
IRS generally considered rental income as a "passive activity", which is subject to special rules.
If you had a net loss of rental activity, as it is very likely with the help of capital cost allowance, under the rules of passive activity, you can not use the loss to offset your other taxable income, such as your salary.
If you (and your spouse if married) actively participate in the rental of your property business, however, you can get a special break.
Subject to income limits, you may be able to deduct up to $ 25,000 for the loss of activity ($ 12,500 if you file as married filing separately and you lived outside your spouse all year.)
you can use the loss to offset nonpassive income, such as your salary.
If you are a real estate professional and you meet certain requirements for the time spent on leasing activities, you may be able to handle your rental real estate activity as a nonpassive activity.
Likewise, if your investment is not "at risk", meaning that you can not lose part or all of the money you have in it, you can not take a loss tax more than the amount you have at risk.
you probably do not need to worry about this rule, unless you have a more complex financial investment. The smaller time investment real estate investors are fully "at risk".
higher adjusted gross income can mean no deduction for the loss of rental
If your adjusted gross adjusted income (MAGI) is between $ 100,000 and $ 150,000 or more ($ 50,000 and $ 75,000 if married filing separately), your maximum loss allowed is reduced.
You can not make a special allowance for renting a property loss if your MAGI is more than $ 150,000 ($ 75,000 if married filing separately).
you can carry the loss forward unused until you have a year with a lower adjusted gross income, or until the year in which you sell or otherwise dispose of the property.
amortization isn 't the only deduction you can take
you can take other deductions related to your rental property
Examples :.
- Advertising
- car expenses or the standard rate of 57.5 cents per mile (in 2015) or your actual expenses like gas, oil and depreciation
- Cleaning
- non-mortgage interest, such as credit card interest on a card that you use only for rental fees
- insurance, including a fire, flood, liability and mortgage insurance.
- legal fees and costs of tax preparation for your rental activity
- Maintenance
- management fees
- mortgage interest, usually reported to on form 1098
- property and liability
- repairs, such as repairing the dishwasher, repainting regularly, or fixing a leaking roof
- Supplies
- taxes
- travel expenses when traveling overnight to improve the property
- Utilities
timing is everything
If you are based on money, like most taxpayers, you report income when you receive. This is true regardless of the period to which the rent is applicable.
For example, if your tenant pays you 30 December 2015 to January 2016 rent, you must report the income with your 2015 taxes.
waiting to cash the check until 2016 will not help -. you must declare the income in the year the funds have become available for you
Follow special rules for deposits
If you receive a security deposit that you expect to return to the tenant do not report as income. If a deposit is not refundable, secondly, you must report as income when you receive it.
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