If you are looking for good payoffs from your real estate investments, there are certain things to be considered. One such factor is the rental income taxes that accrue on such property. However, if you wish to invest in residential income property, you would be happy to know that such investments offer deductions that can be claimed while filing your income tax returns. Since such deductions reduce the tax to be paid on your profits, you stand to enjoy a larger share of the income.
To begin with, deciding on what kind of real estate investor you are is an important task. You can be a real estate investment professional or a passive investor. Based on the category to which you belong to, the number of tax breaks that you can get will vary. If you are a real estate professional who spends majority of his/her time in the real estate business, your rental losses would not be counted as passive. So, from your income - passive and non-passive, such losses are fully deductible. According to IRS (Internal Revenue Service), a person who spends more than one-half of his/her working time (including time spent on property acquisition, development, construction, and management) on the rental business is a real estate professional. Each year, you should also spend more than 750 hours to work on your real estate rental properties. In case you don’t belong to the category of a real estate professional, your losses would be counted as passive. So, against your rentals' income, you can avail of deductibles up to $25,000 only. For losses above $25,000, you can carry them over to the following year.
While considering rental income taxes, remember that the money you receive for rent is usually considered taxable during the year of receipt, not when it was earned or became due. So, you would need to include advance payments as income.
Expenses paid by your tenant on your behalf are considered as income. So, an emergency repair on a refrigerator of your tenant while you were out of town would be your income. However, you can claim deduction for the repair payment as a rental expense. Similarly, if your tenant wants to trade his/her services in exchange for rent, you will need to consider a fair market value of the same and consider such services as your income. For example, the offer by your tenant to paint the rental house in lieu of monthly rent (where one month’s rent is valued at $1,000) would be counted as your income worth $1,000 even though you didn't receive the money actually. However, you can deduct the amount of $1,000 as an expense.
In some cases, security deposits can also be shown as deductible expense, especially when the tenant fails to live up to the lease terms. Mortgage and travel expenses of the owner of the property are also deductible.
For the purpose of calculating rental income taxes, some other deductible expenses include the amount paid on lawn care, insurance, fee for tax return preparation, as well as the losses from thefts or causalities like earthquake, hurricane, flood, etc.
So, as a real estate investor, it pays to know the type of deductions that you qualify for.
- Advantages of utilizing income property management services
- Residential property investment and Commercial property investment
- Prospects of Real Estate Income Property Investment in Ohio
- How to invest in Ohio property: Investment Property Buying Tips
- 9 Reasons to buy Commercial Investment Property in Ohio
- How to Buy a Rental or Investment Property
- Rental property tax deductions
- Benefits of cash flow property investments
- Need Passive Income? Positive Cash Flow Real Estate Best Option
- Best Investment Properties - How to Find the Perfect Property