Owning property can be a worthwhile investment. However, as with any other investment, you need to know how to get the most out of it. While there are several taxes associated with property ownership, the good news is, there are also various provisions in the U.S tax code for tax breaks. As a property investor, a sound tax strategy could significantly reduce your taxes and save you money. In this article, we’ll explore some useful tax tips for property owners looking to reduce their taxes.
1. Be keen on your bookkeeping
The IRS scrutinizes tax deductions very thoroughly. Always keep a detailed record of all expense related receipts, bank statements, rental income receipts e.t.c. Proper bookkeeping ensures you don’t miss out on any deductions you are entitled to and that you don’t get fined for filing incorrectly. If there is too much paperwork to keep track of, consider hiring a tax professional or accountant.
2. Identify all your deductible expenses
Your taxable rental income is total rental income minus expenses. You need to be aware of the expenses that are deductible.
There are two types of property expenses- current and capital. Current expenses are short term expenses incurred to keep your property in a habitable condition. You deduct them during the tax period they were incurred. Examples of current expenses are repairs, utility bills, and property management fees.
Capital expenses are costs incurred on improving the value of the property or extend its life. They are therefore considered long term and include insurance, maintenance costs, and legal fees.
These are some of the typical deductible expenses property owners incur:
- Loan Interest- any interest accrued on loans spent on a mortgage repayment or maintenance and repair costs
- Insurance premiums- all business related premiums including homeowners, flood, theft, fire, and mortgage insurance.
- Maintenance costs- expenses incurred on items such as landscaping, pool maintenance, pest control and smoke detectors.
- Repairs- expenses incurred on fixing broken fixtures, fittings or the structure of the property e.g. painting, plumbing, air conditioning.
- Utilities- gas, electricity, water/sewer, heating bills paid for by property owner.
- Local taxes- city, school, and county property taxes are deductible when filing your returns.
- Asset Depreciation- the annual depreciation costs of the property structure, fittings, and equipment.
- Travel expenses- any costs incurred by the property owner traveling to visit the property.
- Advertising- costs incurred on advertising the rental property.
- Operating Costs- if you have an office, whether rented or at home where you conduct your rental business, operating costs are deductible.
- Asset management fees- money spent on property management companies, on-site managers, etc.
- Professional fees- expenses incurred on lawyers, accountants, court fees, tax professionals or professional software.
- Commissions- incentives paid to property agents or for tenant referrals.
For any of these expenses to qualify as deductible, they must be deemed necessary, ordinary and reasonable by the IRS.
3. Hire a property management company
A professional property manager can help increase your rental income by ensuring occupancy is at its optimum. They can ensure the property depreciates slower by carrying out the repair, maintenance, and remodeling on your behalf. Your operating costs including traveling and advertising will reduce. Additionally, from experience, they may offer you tax tips that save you even more money. Also, because their management fees are tax deductible, this means fewer taxes for you. If you are in California, it is easy to find a property management company in Carmichael.
4. Deduct losses on rental activity
This is one of the less known tax tips; you can report up to $25000 loss on property income if your non-property income is less than $100000. For example, if your property depreciates by $50000 in a year and you only collect $40000 in rent, you can file $25000 loss in that year.
5. Avoid Capital Gains Tax
The IRS charges a capital gain tax on any rental property you sell. To calculate capital gain, subtract the property’s purchase price, total maintenance costs and sale costs (conveyancing, realtor, local taxes e.t.c) from the sale price. The federal and state capital gains tax is between 25-30%.
To avoid paying this tax, you can buy another rental income after the sale. According to the 1031 exchange, if you purchase a property valued at equal to or more than your sale price within 45 days of the sale, you defer capital gains tax. This transaction is known as a like-kind exchange. If you are planning to sell your rental property, this can be a great strategy to avoid extra taxes.
6. Get your Property Valued
Many homeowners pay higher taxes than their property value dictates due to many reasons including:
- Errors in property cards- your home’s acreage, size, and value could be mistakenly overstated at the town hall.
- Your neighborhood’s property values may be depreciating, or your property is deteriorating due to natural causes.
- You may have approved but unfinished remodeling projects which the state has already factored into your property value.
For the above reasons and more, it would be worth investing in a professional property valuer to give you a genuine reflection of its current value. A valuation may reflect in lower taxes in the long run.
7. Explore tax exemptions
You may not be aware of or taking advantages of some tax exemptions to which you are entitled. For example, a state may have exemptions for senior citizens, veterans, or people living with a disability. There may also be exemptions for energy efficient properties. Other states may offer exemptions for owners of historic buildings. Therefore, finding out your state’s tax exemption policies is one of the tax tips that could earn you a much-needed tax break.
8. Refinance Your Rental Property
If you’ve owned rental property and have paid up your mortgage, you have built up some good equity. You could qualify for a second mortgage to purchase another rental property or to improve your current property. The interest on this mortgage is tax deductible, provided all the proceeds go to maintenance or acquisition of another rental income.
As you can see from these tax tips, there are several ways you can save on taxes and maximize your property investment profits. Other than freeing you to concentrate on other issues, Property managers in Carmichael may be able to offer you advice on getting the most out of your rental properties.