There’s great news coming your way if you are an independent landowner or a real estate owner. The tax season is stressful for most people and is probably worrying you too. But if you are someone who hands out one or more of your rental properties, then the IRS is allowing you lots of deductions on your rental income. You can maximize your returns by making use of tax benefits and in the process, boost your profits. Often, these deductions are overlooked by most taxpayers. This article explains how you, as a landlord, can make the most of your income derived from your properties this tax season.
Pass-Through Tax Deduction
For the Tax Year 2018, many independent landowners will be eligible for income tax deductions for their pass-through businesses. This is a part of the Tax Cuts and Jobs Act (Section 199A). Pass-through entities are those entities which are taxed as per the individual tax rates of the owner and not as per the business tax rates. C-companies do not have this benefit. You can be eligible for a tax deduction up to 2% of your qualified business income, if:
- You are operating your rental properties through a limited liability company, S corporation, partnership, sole proprietorship, estate or trust.
- If you are single and your taxable income is below $157,500. If you are filing jointly, then, your taxable income should be below $315,000.
Plus, The Treasury Department has also added that the rental real estate owners who use at least 250 hours every year to manage their property will be eligible for the said deduction. However, they need to maintain a detailed record of their management work.
You can get deductions on your necessary and ordinary expenses too! Ordinary expenses include simple expenses like fixing ceiling holes. The necessary ones include advertising for new tenants. However, improvements are not considered when it comes to tax deductions. This is because improvements add longevity and value to the property. Thus, it must be capitalized first and then slowly depreciated over a period of time.
Depreciation is a strategy where expenses on buying a rental property are spread out for the expected life of the said property. Rental buildings are to be depreciated for a duration of 27.5 years. However, your property can be depreciated only if it meets the IRS’ requirements which include:
- You are the owner of the property
- You are using it for your business or any other income-generating activity.
- You can determine its usable value
- The lifetime of the object will exceed one year
Improvements done on your property are depreciated in a similar manner, though the time span varies according to the items. Some of the common improvements include:
- A newly modeled kitchen
- An upgrade of air-conditioning
- A landscape in the backyard
- A new roof
Office In Home
If you are using a portion of your own home for your rental business, then you can be eligible for the home office deduction. The deduction amount will be on the percentage of the home space that you use for office purposes.
Legal And Professional Aid
You can get deductions for any costs incurred on professional services from an accountant or a lawyer.
If you are traveling for the purpose of managing your rental property, then you need to maintain a detailed record of the same. Even if you use your own personal vehicle for the purpose of purchasing supplies for your business, for repairs, or for showing your property to potential renters, then keep a record of your mileage. Once the total mileage and the mileage used for business purposes are compared, it can be used to calculate the other expenses incurred like money spent on gas, maintenance, and repairs.
If you have any business loans or rental property mortgage, and you have paid interest on them, it can be deducted under business expenses.
Keep a record of the wages that you pay to your contractors, full-time and part-time employees. They are deductible.
Premiums paid for insurance policies on your rental property with respect to liability, theft, flood, and fire are also deductible. Even premiums like workers’ compensations are deductible.
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