Rental properties certainly enable the real estate investor to enjoy quite a few benefits; with these, however, come more stringent tax requirements. In fact, the Internal Revenue Service applies two sets of taxes on such properties – based, respectively, on how much money it garners you during ownership, and on how much it generates when sold.
Rental Income: Tax Deductions
Since owning commercial real estate property is such a robust and involved process, you should expect there to be plenty of tax deductions. Indeed, you can take some interest in the mortgage, the labor costs of property maintenance/repairs, Housing Association dues, advertising costs (when you were shopping the rental properties), pest control, legal issues, and insurance costs. It’s worth your time and money to liaise with a tax expert to make sure you receive as much as possible from these tax deductions.
Additionally, there’s something called the “depreciation expense”; it has the ability to be so robust that it outstrips the tax deductions you receive from all the other ones combined. The depreciation deduction concerns long-use machinery, property, etc; you can take thousands of dollars off if you spend several times this much during the operational lifetime of the equipment or building. For commercial properties, the relevant time span for depreciation taxes is 39 years; for residential properties, it is 27.5 years.
The QBI or Qualified Business Income
This is yet another viable deduction that the IRS allows and is also known as the deduction for pass-through income. As you can tell by the name, it is a deduction that applies specifically to any income that employed an S-Corporation or LLC (or any other approved pass-through entity). You can take up to 20% of this income as a tax write-off.
Of course, it is always advisable to speak with a tax professional regarding the particulars of the tax deductions that apply to rental properties; the finance experts here at Aspen Capital Solutions are a great start – contact us at your convenience.