Qualifying for Tax credits
Many landlords think about deductions to offset taxes once they already have a tenant and are receiving income, but they may not think about tax credits or consider them when they first purchase properties. Many property managers aren't aware of them or are unsure how to claim them. These credits can help offset the taxes that must be paid on revenue and can be a big financial help when used correctly.
Rehabilitation Tax Credit
This tax credit is given for renovating, restoring, or reconstructing certain homes. It does not apply to new construction or to the expansion of existing buildings. You can usually claim 10 percent of the costs for buildings that were in service prior to the year 1936 or 20 percent for buildings that have been certified as historic locations. These cannot be owner-occupied residential properties.
The federal government provides a tax credit of 20 percent for rehabilitating historic properties that produce income. They must be certified as historic structures, and the rehab work must be reviewed to ensure that it meets standards. The National Park Service and State Historic Preservation Offices handle the review and follow the guidelines set by the Secretary of the Interior's Standards for Rehabilitation.
This tax credit can be used for condominiums as well as single-family units. There are restrictions that determine whether a property will qualify, including how many structural changes can be made. The Internal Revenue Service has publications that go into greater detail on this specific topic.
Low-Income Housing Credits
The Department of Housing and Urban Development (HUD) provides grants to the individual states for the purpose of building, buying, and renovating housing to make them affordable for low-income families. These grants can be passed down to the buyers of the properties to attract tenants who qualify as low-income. The credit exists to offset rents that are below market value so the landlord can continue to turn a profit. Restrictions apply, including the requirement of maintaining a certain percentage of units that qualify as low income housing. An investor or landlord can talk to the local HUD agency to find out if current properties qualify.
New Markets Tax Credit
This tax credit is designed for investors, property management companies, and even nonprofits involved in real estate. The requirement is that the property to be purchased must be located in areas that have high rates of unemployment and poverty. This credit has existed since the year 2000 and is quite complex.
The investor can claim up to 39 percent of the original amount of the purchase price. It is claimed over seven years rather than all at once. The breakdown is as follows:
- Five percent for years one through three
- Six percent for years four through seven
To qualify for the credit, the investor must make investments in a special financial institution called a Community Development Entity (CDE). A CDE is basically the middle man for loans made in low-income communities. It is a partnership or corporation that has received certification and receives special allowances, including the New Markets Tax Credit.
Credits vs. Deductions
Many expenses can be claimed as deductions for landlords to help reduce the amount of income that is reported. They are figured in before the final total is determined for taxation. While credits come off the bottom line and reduce the actual amount that must be paid by the full dollar amount of the credit, a deduction is an expense that can be claimed to reduce the amount you pay by a percentage and is calculated in your expenses.
While you want to claim all of the deductions you are entitled to, you don't want to overlook the tax credits that you may qualify for. Ideally, property managers should speak to a tax professional before even purchasing a property as a future rental unit to determine what credits are available. Even if you already own a property, you should meet with a tax accountant to ensure you are getting all the tax credits you are entitled to.
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