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Tax Benefits of Owning a Rental Property

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Authored by Geoff Vaughan in Real Estate, Taxes
Published on 02-13-2009

Although there are many ways to invest in real estate, one popular way that more and more people are getting involved in is owning rental properties. Being a landlord is a great way to build equity in real estate by using tenants’ rent to pay the mortgage on the property. And for those who can afford to buy properties outright without a loan, owning rental properties can generate a substantial income. One benefit that is not always considered by people thinking of getting into the landlord business is the tax advantages of this activity.

There are many tax deductions that one can take when owning rental property, starting with property depreciation. Each year, rental owners can depreciate the value of the property, taking a deduction along with it. This can mean a savings of several hundred or even thousands of dollars, although the downside is that it reduces one’s cost basis when he or she goes to sell the house down the road. Simply put, it will be like the owner spent less money to buy the house than originally paid, so the difference between the sale price and the original cost will be greater, and that’s the amount that the taxes are paid on.

Another benefit is that the owner can deduct any property improvements from the rental income for tax purposes that year. So, it’s like getting a big discount on improving the property, and the kicker is that the value of these improvements then goes into the cost basis of the property – and can then be depreciated as well. It’s important to distinguish between an improvement and a repair though, as things like painting and carpet cleaning do not qualify for this. However, installing a new roof or putting in hardwood floors certainly count as improvements.

Other deductions include the property taxes paid for that property, any insurance such as fire insurance which owners will likely have, commissions paid to realtors for finding renters, and management fees paid to rental property management companies. Those are all pretty obvious, but one can also deduct travel expenses going to and from the property, which can even include airfare and rental car expenses if the property is out of town.

And after taking the final tally of your adjusted income or loss from the property, many times owners will show a loss on paper. If he or she took an active role in managing the rental property, such as making decisions on repairs or finding the renters to occupy the home, that loss can then be counted toward reducing the person’s adjusted gross income, so that fewer taxes are owed on the person’s overall income that year. If the owner had nothing to do with the property while it was being rented out that year though, any loss cannot be carried over to the rest of the return. This is called the Passive Activity Loss rule.

By owning rental property, a person can take advantage of many different types of tax deductions to maximize the monetary gain on the property. Rental properties can not only be used to build equity from the tenants’ rent payments, but one’s overall tax burden can actually be reduced if the owner knows how to take the many deductions available to rental property owners.

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