5 Tax Benefits of Owning Rental Property
Many real estate investors have rental properties in their portfolios. The rental income can provide a nice supplement to your regular earnings, and it also comes with some great tax benefits.
Tax advantages aren’t cheating the system. It’s using the system the way it was intended.
1. The Mortgage Interest & Fees Deduction
This is probably the most well-known tax benefit of owning rental property. You can deduct the interest you pay on your mortgage from your taxable income. It adds up to serious savings come tax time.
Mortgage-Related Feels You Can Write Off
- Appraisal
- Title Insurance
- Property Surveys
- Transfer Taxes
- Recording fees
- Lender Points or Fees
2. The Depreciation Deduction
Another great tax benefit of rental property ownership is the depreciation deduction. This allows you to deduct a portion of the cost of your rental property over several years. According to Investopedia, “most U.S. residential rental property is depreciated at a rate of 3.636% each year for 27.5 years.” It’s a huge help when it comes to reducing your taxable income and saving money on your taxes.
What Improvements Can Be Written Off?
- Installing a New HVAC System (Central Heating & Air)
- Home Additions
- Carpeting or Flooring
- Painting
- and More
What Can’t Be Written Off As Depreciation?
According to the IRS, some things can’t be written off. A few of those things are:
- Clearing brush or trees
- Planting shrubs, flowers, or bushes
- Lastly, any landscaping work
Any activities considered part of the cost of the land and not the buildings aren’t eligible.
3. The Expense Deduction
Next, let’s explore the mortgage interest and depreciation deductions. It allows you to deduct a variety of other expenses related to your rental property. These expenses can include things like:
- repairs
- maintenance
- insurance
- and property taxes.
4. The Capital Gains Exclusion
According to the IRS, when you sell your rental property, you can exclude up to $250,000 of the capital gains from your taxes (or $500,000 if you’re married and filing jointly). This is a huge benefit that can save you a lot of money come tax time.
3 Ways to Avoid Capital Gains on a Rental Property
There are a few ways to avoid paying capital gains taxes.
- Use Tax-Advantage Accounts
- Hold the Property For a Year
- Hire a Fiduciary Consultant
If you’re smart, you will use these things to your advantage.
5. Pass-Through Deduction
The tax law enacted in December 2017 included a new deduction for rental property owners who file as sole proprietors, partnerships, LLCs, or S corporations. This deduction, often called the pass-through deduction, allows you to deduct up to 20% of your rental income from your taxes.
How Does This Work?
An example of a pass-through deduction would be if you earned $50,000 in rental income and paid $15,000 in taxes on that income. With the pass-through deduction, you could deduct $10,000 of that income (20% x $50,000), which would leave you with a tax bill of just $5,000.
It is a huge tax break for rental property owners and can result in significant tax savings. To take advantage of this deduction, you’ll need to file Form 1040 and itemize your deductions on Schedule A.
Final Takeaway on the Tax Benefits of Rental Property
These are just a few of the tax benefits that come with owning rental property. Consult with a tax professional to learn more about how you can take advantage of these deductions and save money on your taxes.