Rental properties are a great investment. That is why most investors looking to diversify their portfolios consider property investment. However, before you invest your money in rental properties, it is also good to understand the tax implications. It is a known fact that rental property taxes are more complex than the usual income taxes, but that does not make them hard. When you own rental properties, there are two sets of taxes you should know about. That is how the IRS will treat the income you are generating from the rental property and how it will treat the sale of that rental property when you choose to sell.
How Do Taxes Work on Rental Properties?
If you own property and are renting it to tenants, you will be paying rental income tax. This rental income is taxed as the usual income tax. For instance, say you fall in the 22% marginal tax bracket and are receiving $10,000 in rental income, then you will pay $2,200. However, there are several ways you can reduce your tax burdens through tax deductions.
Rental Income Deductions
There are certain expenses associated with owning rental properties, and they can be deducted from your rental income. This includes insurance costs, mortgage interest, cleaning and maintenance, advertising costs, the salary of the property manager, legal fees, etc. After deducting all these expenses, the income that is left is what is taxed.
Qualified Business Income Deduction
The qualified business income deduction is also referred to as the pass-through income deduction. According to the IRS, eligible taxpayers can deduct up to 20% of their business income. This also includes income they get from a pass-through entity such as an S-Corp or an LLC. Rental income received from an investment property falls in this category as well.
The Depreciation Expense
Another tax advantage that comes with rental properties is depreciation. This is one of the reasons you will find a rental company that shows no income for tax purposes. Property structures deteriorate with time, and that is something you can take advantage of by deducting the depreciation of your property from your taxes.
Do not let the fear of taxes prevent you from investing in rental properties. If this is an investment you have your eyes on, reach out to us as Aspen Capital Solution. We will help you with the funding you need to invest in rental properties.