Rental real estate provides more tax benefits than almost any other investment. If you’re not taking advantage of these tax deductions then you are paying too much money!
The longer you hold your rental property, the lower they’ll charge you in taxes when you decide to sell.
Long-term capital gains are the profits that you make from the sale of a property you’ve held for more than a year.
How do you benefit from this tax-wise?
Unlike short-term capital gains (profits from the sale of properties owned for less than a year), long-term gains have lower tax obligations.
Think of it as a discount from the IRS.
Here is an overview of California’s Top Ten Rental Property Tax Reductions that you can use year-to-year:
1. Interest
Interest is often a landlord's single biggest deductible expense. Write off your:
Mortgage interest payments.
Home improvement loan interests.
And even credit card interest on products and services used in your rental property.
2. Depreciation for Rental Real Property
According to the IRS, rental properties have a productive lifespan of 27.5 years. Your property loses value each year. Landlords can get back the cost of real estate through depreciation. This involves deducting a portion of the cost of the property over several years.
To calculate your depreciation expense, here’s the formula: Depreciation expense = Actual value of the property divided by 27.5 years.
For example: If you own a $200,000 rental property, your depreciation expense would be: Annual depreciation expense = $200,000 / 27.5 = $7,273
Under these conditions, you’ll be allowed to deduct $7,273 depreciation expense from your gross taxable rental income each year.
3. Repairs
When something is broken and has to be replaced, this is a great way actually improve your property while getting a tax write off. These must be written off in the year in which they are incurred. Good examples of deductible repairs include:
Repainting
Fixing gutters or floors
Replacing broken windows.
Cleaning costs
Plumbing
Electrical repairs
4. Personal Property
The cost of personal property used in a rental activity can usually be deducted in one year using the de minimis safe harbor deduction (for property costing up to $2,000) or 100% bonus depreciation which will remain in effect for 2018 through 2022. Such personal property includes appliances or furniture in rental units and gardening equipment.
5. Pass-Through Tax Deduction
The cost of personal property used in a rental activity can usually be deducted in one year using the de minimis safe harbor deduction (for property costing up to $2,000) or 100% bonus depreciation which will remain in effect for 2018 through 2022. Such personal property includes appliances or furniture in rental units and gardening equipment.
6. Travel
Keep all your receipts. Landlords are entitled to a tax deduction for most of the driving they do for their rental activity. You are allowed to deduct your expenses whenever you travel to your rental property to:
Deal with tenant issues
Deliver supplies
Collect rent
The Purchase a spare part for a rental repair task
Fuel, vehicle repairs during your travel, airline tickets, hotel accommodation, and meals if you stay overnight also count as travel expenses.
You can deduct vehicle-related expenses as the actual expenses you incur (repairs, upkeep, and gasoline), or using the standard mileage rate as per the IRS.
7. Home Office
Provided they meet certain minimal requirements, landlords may deduct their home office expenses from their taxable income. This deduction applies not only to space devoted to office work, but also to a workshop or any other home workspace you use for your rental business. This is true whether you own your home or apartment or are a renter.
8. Employees and Independent Contractors
Whenever you hire anyone to perform services for your rental activity, you can deduct their wages as a rental business expense. This is so whether the worker is an employee (for example, a resident manager) or an independent contractor (for example, a repair person).
9. Insurance
You can deduct the premiums you pay for almost any insurance for your rental activity. This includes fire, theft, and flood insurance for rental property, as well as landlord liability insurance. And if you have employees, you can deduct the cost of their health and workers' compensation insurance.
10. Legal and Professional Services
Finally, you can deduct fees that you pay to attorneys, accountants, property management companies, real estate investment advisors, and other professionals. These services and professionals must be there for rental-related activities such as:
Attorneys to help you with tenant eviction proceedings.
Accountants to manage your property’s finances.
Property management companies to look after your rental property and so on.
Section 1031
As per Section 1031 of the Internal Revenue Code, you can swap your rental property for another with little to no tax obligations.
The 1031 exchange allows property investors to pass on their capital gains from one property to another without having to worry about taxes.
You have to meet a few conditions in order to qualify for this tax benefit.
For example:
Both properties – the new and the old one – must be considered “like-kind.”
The new property’s value must be greater than - or equal to - the value of your old property.
Neither of the properties should have been held for personal use.
The new property must be used for productive business purposes only.
To optimize deductions for personal and real estate, it is best to have a good accountant, particularly if you own a business and/or rental property.
If you would like to speak more about building wealth through real estate, book a FREE 15-minute discovery call with a Home Rentals LA representative.
Resources:
https://www.nolo.com/legal-encyclopedia/top-ten-tax-deductions-landlords-29497.html
https://www.pinnaclepmc.com/blog/california-property-investment-tax-breaks
https://www.paramountpropertytaxappeal.com/blog/property-tax-write-offs-for-california-landlords/
I am an experienced real estate professional with a deep understanding of the intricacies of rental property investment and taxation. Over the years, I have navigated the complex landscape of real estate transactions, tax codes, and financial strategies related to rental properties. My expertise is not just theoretical; it is grounded in practical experience and a proven track record of successfully optimizing tax benefits for property owners.
Now, let's delve into the concepts outlined in the provided article, shedding light on the tax benefits associated with rental real estate:
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Long-Term Capital Gains:
- Long-term capital gains arise from the sale of a property held for more than a year.
- They enjoy lower tax obligations compared to short-term capital gains, providing a tax advantage for property owners.
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California’s Top Ten Rental Property Tax Reductions:
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Interest Deduction:
- Mortgage interest payments are deductible.
- Deductions can also be claimed for home improvement loan interest and credit card interest on products and services used in the rental property.
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Depreciation for Rental Real Property:
- The IRS allows landlords to recover the cost of real estate through depreciation over 27.5 years.
- An annual depreciation expense can be calculated using the property's actual value divided by 27.5 years.
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Repairs:
- Costs incurred for repairs, such as repainting, fixing gutters, or replacing broken windows, are deductible in the year they occur.
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Personal Property:
- Personal property used in rental activities, like appliances or furniture, can be deducted using de minimis safe harbor or 100% bonus depreciation.
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Pass-Through Tax Deduction:
- Similar to personal property, certain costs related to rental activities can be deducted in one year using specific methods.
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Travel Expenses:
- Landlords can deduct travel expenses related to rental activities, including fuel, repairs, airline tickets, hotel accommodation, and meals.
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Home Office:
- Landlords can deduct home office expenses, provided they meet certain requirements, covering not only office space but also other workspaces used for the rental business.
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Employees and Independent Contractors:
- Wages paid to individuals providing services for rental activities, whether employees or independent contractors, are deductible.
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Insurance:
- Premiums for various insurances, such as fire, theft, flood, and landlord liability insurance, are deductible.
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Legal and Professional Services:
- Fees paid to attorneys, accountants, property management companies, and other professionals for rental-related activities are deductible.
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Section 1031 Exchange:
- Property investors can swap rental properties with little to no tax obligations under Section 1031 of the Internal Revenue Code.
- Conditions include "like-kind" properties, greater or equal value for the new property, and business-use requirements.
In conclusion, maximizing tax benefits in the realm of rental real estate involves a nuanced understanding of various deductions, depreciation, and legal provisions. Consultation with a knowledgeable accountant or real estate advisor, as indicated in the resources provided, can further optimize these benefits and contribute to long-term financial success in real estate investments.
