Know The Five Main Tax Advantages of Owning Rental Property

Among the ways investors hope to profit from renting is by generating income and increasing owner equity in the long run. Many other income-producing assets do not offer the same tax benefits as rental properties.

The U.S. tax code is surprisingly friendly to beginning real estate investors, often surprising them. Keep reading to learn the biggest tax benefits of owning rental property.

Why are so many people getting into the rental property business in recent years?

The housing market has been steadily recovering since the 2008 recession. The median home value is now $200,000, up from $150,000 in 2009. Interest rates have also decreased. This combination has made it more affordable to buy houses than it was 10 years ago.

Recently, we have seen more people getting into the rental property business. They want to take advantage of all these tax benefits and deductions with owning a rental property.

What are Capital Gains on a Rental Property Tax Advantages?

Capital gains exclusion is a tax applied to the sale of a property. The capital gains exclusion is an amount of money that you exclude from the total income in order to calculate the taxable income.

What is Passive Income on a Rental Property and How Does that Affect Taxes?

Passive income is any income that you do not have to work for. The two most common types of passive income are: 

- Rental Income 

- Dividends 

The first type is the easiest to understand. Rental income is simply money made off leasing out the property to tenants. This type of passive income has a few different tax implications that depend on whether or not you have a mortgage on the property. Suppose you are renting out your property with a mortgage. In that case, all of your rental earnings are considered taxable as ordinary income, and you will be taxed accordingly at your marginal rate (based on your filing status). If you have no mortgage, then only half of your rental earnings are considered taxable as ordinary income. They can deduct your other half from your taxes as long as it does not exceed certain limits ($25,000). 

The second type of passive income is dividends. Dividends are a type of income you may receive from publicly traded companies. A dividend comes from a share of the company's profits, which you have purchased for your own personal investment account and received as income. However, to qualify for the capital gains tax exemption rule (which only applies to individuals), an individual must hold the shares for more than one year before receiving the dividend payment or at least 90 days after they sell them on the market. 

Key Tax Advantages Of Owning Rental Property

1. The first advantage of owning rental property is the depreciation deduction.
2. The second advantage of owning a rental property is the mortgage interest deductions.
3. The third advantage is that there is no limit on how much you can write off as a loss due to depreciation, and there are other ways in which they will deduct the loss.
4. The fourth advantage is that you can take losses up to $25000 against your income and have this decrease your taxable income.
5. The fifth disadvantage is that the lost profits may be higher, and they will only be deductible up to the amount of the gain.
6. The sixth disadvantage is that there are no exclusions for these types of losses.
7. The seventh disadvantage is that there are restrictions on holding long investments before taking a loss.
8. Eight disadvantage is that you cannot carry the depreciation cost into future years as an expense.
9. Nine disadvantage is that in order to deduct these losses, you must find a statutory use for the property, and there are also limitations if you sell or lease it during the year.
10. Ten disadvantage is that there may be limits on what kind of property you can use as investments, and they do not always give out income.

 

Final thoughts

There are several rental properties tax advantages to owning a rental property, but in order to claim them, investors must have documentation to back up their claims.

Using Tottax to track real estate investments is a good way to automatically keep track of income and expenses for a rental property.

Tottax is completely free and allows investors to track property performance easily, export tax-ready financials at tax time, and create the paper trail that all rental property owners require. Rental property owners can also organize and store all real estate documents online in a secure manner.

Or you can do is visit the Tottax website and get a free consultation from their professionals.