Tax Tips: All About Rental Property Tax Breaks

Rental property offers investors a potentially lucrative income. This income not only comes from the rent received from tenants, but from tax breaks offered by the government.

People invest in property not only for the income potential it offers, but also for the tax benefits that come with owning and renting out property. Owning property and renting it out is a business. You take in revenue (rent) and incur expenses just like with any other business. As with any commerce, there are tax benefits associated with owning rental property. The major tax breaks are discussed below.

The majority of operating expense deductions comes from money that you have spent on the property. There are deductions allowed for mortgage interest and property taxes, as well as deductions for insurance, maintenance, and repair on the buildings. One expense that requires no spending of money is depreciation on the property. This is an accounting deduction that is allowed and is based on the overall wear and tear on your building.

If you show a loss on your rental property, where your expenses exceed your income, you might be able to deduct the loss on your tax return. The only way that you can deduct the loss is to be an active participant in the management of the property. You can hire a property manager to perform the day-to-day tasks, but you need to be actively participating in approving terms of contracts, interviewing potential tenants, and approving expenditures that go toward maintaining the building.



If for some reason you decide to sell your property, you will owe taxes on your gain or profit. In fact, the way the government defines your gain means you not only pay taxes on your profit made from the sale, but you also pay an additional amount on the properties depreciation. The thought of having to pay so much in taxes often causes people to hold on to their property. However, if you still want to sell, you can avoid paying taxes on the profit by exchanging it for a like-kind property. The government has a broad definition of like-kind property, so you will need to consult with an attorney or tax advisor if you choose to roll over your capital gain.

There are special tax credits for people who invest in low-income housing or particularly old commercial buildings. These tax credits can represent a direct deduction on your tax bill. These tax incentives are given to investors willing to purchase rundown buildings and fix them up instead of allowing the building to continue to deteriorate. The credits range from 10% of your expenditure to 90%. It all depends on the type of property you have purchased. The government does have strict rules about what properties qualify, so you will need to research before you buy.

With stocks and mutual funds fluctuating, you may decide that investing in rental property has more income potential for the future. The income potential not only comes from the revenue generated by renting out to tenants, but also from the tax breaks offered to property owners by the government. If you are willing to put forth the money and the time it takes to build up your income, rental property can be a great way of investing in the future.

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