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"Rental Property Taxes: The Good, the Bad, and the Ugly"


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You may think that the only impact of rental property taxes falls on the expense side of the ledger, but that's not true. In fact, it's the tremendous investment property tax benefits that really put real estate at the head of the class of long-term investment options.


REAL ESTATE INVESTMENT TAX BENEFITS


The main rental property tax benefit is the ability to reduce your tax liability by itemizing deductions on your personal income tax filing (more on this below). The impact is more money in your pocket in the form of a smaller tax payment or a larger refund.

The best part is that you can deduct "expenses" that you may not even pay cash for, including:

Few if any of the traditional investment vehicles have these kinds of tax benefits. Even though Uncle Sam will always find a way to tax investment property, in essence, much of your financial benefit is sheltered.


INVESTMENT PROPERTY TAX EXPENSE CATEGORIES


Your real estate investment tax expenses will generally fall into the following categories:

Note that this website does not include any detail on transfer tax because each state has different rules and regulations around this. Essentially, it's a form of sales tax – it's a way to tax investment property when it changes hands. The specific amount and who must pay it tend to vary. Your rental property agent will know the specifics so you'll want to ask him about it.


THE NEED FOR A GOOD TAX ACCOUNTANT


When it comes to this stuff, I know just enough to be dangerous. I'm certainly no expert on rental property taxes and so I strongly suggest that you get an accountant if you don't already have one.

A good accountant may charge $300-$500 to file your annual tax returns, but it is well worth it. Here's why:

  • Your federal tax return will be more complex due to the additional schedules and details required for your real estate activity, which increases the odds of making an error.
  • A good accountant will help you squeeze out the maximum number of tax deductions, which usually more than pays for the cost of his/her services.
  • You'll have access to expert real estate investment tax advice whenever you need it. Setting up an LLC, gifting a property, or setting up a trust are examples of situations beyond the annual filing of taxes where your accountant will be able to provide valuable guidance.


HOW TO FILE TAXES ON REAL ESTATE ACTIVITY


One way or another, the Fed is going to tax investment property. But the way it'll be taxed might vary.

Your rental property taxes will flow through your personal federal tax return if:

  • You are holding title in your own name, or
  • You are holding title in the name of a single-person real estate LLC (highly recommended)

These are the most common ways to hold title, and if either describes your situation then your accountant will not have to file separate tax returns for your "business." Your rental property tax deductions will be offset against your regular employment income as part of your personal federal tax return.

If, on the other hand, you are holding your properties in another way (partnership, multi-member LLC, S-corporation, etc.), it is likely that your accountant will have to file separate returns for your real estate investment tax.




Return from Real Estate Investment Tax to Homepage



19 Responses to Rental Property Taxes: The Good, the Bad, and the Ugly

  1. ramesh says:

    this website is very useful tax free invest real estate and learn how to return from real estate.i learent investing information from this site

  2. anilsingh says:

    This site is great from a real estate tax perspective. If you need to know about investment property taxes, this page is required reading!

  3. Anamika says:

    If you are looking for some tips on how to file your property taxes, then this article is the end to your search. This article is dedicated to rental property taxes and its benefits.

  4. River Shoes says:

    I had no idea that there would be that many tax advantages to having a rental property. I guess owning one or many rental properties can be a good long term strategy for investing money.

  5. Krishna says:

    Perfect article, appreciate your time and energy. Lot to learn. Thanks

  6. Cyril Edward Inatimi says:

    what is the impact of taxation on real property investor?

    • alank856 says:

      Hi,

      Thank you for visiting my site! You ask a good but loaded question. The basic taxes that all income property investors are subjected to are property taxes and capital gains tax when you sell (at the time of this writing, the long term capital gains tax rate is 15%). But you might be subjected to other taxes depending on whether or not you draw a salary or do profit taking, how your real estate business is set up (LLC vs. S-corp for example), and other factors that are beyond the scope of my expertise. You should definitely discuss this with your accountant before you move forward. Sorry for the vague answer but it really depends on how your business is structured, what state you are located in, the property type, and many other factors too.

      Alan

  7. Morine McNutt says:

    If I sell a rental property in same year purchased what are my tax liabilities.

    • alank856 says:

      Hi – Thanks for your question. If you make a profit on the sale, since you will have had the asset for less than 1 year, you’ll be subjected to short term capital gains tax. This means your profit (defined as your selling price minus your purchase price minus any associated fees and capital improvement expenses) will be taxed at the ordinary income tax rates in effect for the year, ranging from 10% to 35%.

      If you will be making a profit on the sale, and you’re NOT in a lower income tax bracket, my recommendation would be to hold off and sell after you’ve already had the property for a year. This way, you’ll only have to pay long term capital gains tax on your profit, which is a flat 15% at the moment. If you WILL NOT be making a profit from the sale, then there is no capital gains tax and hence it wouldn’t matter when you sell.

      Hope that helps.

      Alan

  8. Dave says:

    Hi. My parents are old and want to sell their home and move to a new small house. Is there tax advantage to me if I buy them a new house and rent it back to them. I currently make over 150k and have no other real estate investment properties. Thanks.

    • alank856 says:

      Hi Dave,

      Thanks for your question. Unfortunately I’m not qualified to give you an answer :( I’ve never been in that situation so I can’t advise you. But what I can say is that you should DEFINITELY ask your accountant.

      Good luck!

      Alan

  9. kopplin says:

    Great site. A lot of helpful information here. I’m sending it to some buddies and also sharing in delicious. And certainly, thank you for your hard work!

  10. Thomas Galloway says:

    I have had this property for at least 5 yrs, in Washington DC, the property is selling for 210,000.00 what am I expecting to pay in taxes. Any help would be appreciated

  11. Zach says:

    Really like your teachings. Perfect for rental property noobs like me!

  12. Tatyana says:

    Does one have to make a profit every once in awhile (every couple yrs, for example), for the property to qualify as an investment or can one show a small loss every year (while building equity)? i.e. if you rent a home for $1430/mo, but your mortgage plus other expenses add to $1450/mo -will such an “investment” not be allowed by IRS?

    • alank856 says:

      Hi – thanks for reading. Whether or not you claim a profit or loss has no bearing on whether or not the property is an investment. For the most part I am able to claim a paper loss with the IRS every year thanks to the many deductions available to property owners. That, in fact, is what makes real estate THE BEST long term investment available today.

  13. C. Johnson says:

    Thanks for the informative article. I have been a landlord for 30 years, and I am now ready to retire and get out of the business. I have read IRS publication 544 Sales and Other Dispositions of Assets, and I have read about section 1250 property. All of my properties are fully depreciated. A number of depreciation methods were used, but all are fully depreciated. From time to time I have also invested in capital “improvements”: replacement roofs, carpet, furnaces, etc. that are separately depreciated. How are these long term capital assets handled in a sale? I expect to use a professional realtor to list and sell the properties. Besides an expected 1099-S, and filing Form 8949 and Sch D, what other IRS forms are involved in reporting a sale? For years I expected that selling could push my income into a higher tax bracket. But it appears that this is not correct – 1250 recap is taxed at flat 25%, and long term cap gain is taxed at flat 15%, and this is unrelated to the graduated bracket of my earned income. Is this correct?

  14. Nhung Ta says:

    I live in VA and have purchased a house in Houston in 2012. It is kind of an impulse buy because it is a good deal. I rent it out to a friend for the cost of mortgage + insurance + property tax + association fee, basically I make no profit.
    Is it complicated to file tax, and am I able to deduct any of the interest + house expense (I have to buy appliances because it does not include with the house).
    I never own any property and always file short form. This year is new for me.
    Thanks for your time and knowledge.

  15. Robin says:

    We should emphasize, however, that investing isn’t a get-rich-quick scheme. Taking control of your personal finances will take work, and, yes, there will be a learning curve. But the rewards will far outweigh the required effort. Contrary to popular belief, you don’t have to let banks, bosses or investment professionals push your money in directions that you don’t understand. After all, no one is in a better position than you are to know what is best for you and your money. –;;

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