Posted in Blog  
  on Dec 03, 2014

Tax Advantages of Rental Property

Rental properties are one of the most lucrative investments that can be made when it comes to the tax advantages that can be found. Although adding the title of “Landlord” may not be for everyone, a property management agency can take on that role for you. Most people already know that the interest from a mortgage and any taxes can be immediately deducted. Here are some of the other tax advantages that a rental property can provide.

Standard Operating Expenses

Whatever it takes to make your rental property an attractive business asset can be written off. These standard operating expenses include most repairs, your maintenance activities, utility costs, HOA fees, and any insurance premiums that you are paying for the rental property.

Not Commercial

Even though your rental property is a commercial asset, it isn't seen as a commercial building. This means you get to depreciate your rental property over the course of 27.5 years under current tax law. For commercial buildings, the depreciation schedule is over the course of 39 years. That's a big annual difference that can save you thousands.

Passive Losses Accumulate

The first years of owning a rental property generally bring about passive losses. You can't claim these losses immediately if you don't have any income to offset them. Once you do get that income, however, you can begin to start using those passive losses that have accumulated over the years to offset the income you've made to limit your liabilities.

There's No Self-Employment

Paying a lot of taxes on your income is never a good thing. If you are working for yourself in your own business, then you're stuck with the ridiculous 15.3% self-employment tax that applies to all of your income. One of the exceptions to this rule is rental real estate income. Although you may not have the SE tax, you may have a 3.8% Medicare surcharge applied to all of your income.

Roll It Over

If you've owned the rental property for at least a year, then you can take the proceeds and put them into another equal or greater investment without penalty. This is called an exchange. If you don't take the exchange, then you'll pay 25% income tax on the depreciated value that you've recaptured over the years and then up to 20% on the sale price of the home. Exchanges can be made for all sorts of property, including non-rental property, like a golf course.

Shelter the Gains

If you still have passive losses at the time you sell a home, they can be used to shelter the gains that you make from a sale. Don't feel bad if you have a lot of passive losses. They stay there on your financial records and will eventually even out the income that you make – even on the sale of a home. That can be a tremendous advantage if you're looking to upgrade your current investment or make a new one.


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