To take advantage of all of the investment properties tax savings, you’ll want to learn all you can on your own and work closely with a tax professional. There are tax benefits for as long as you hold investment property. When you sell for a profit, however, be prepared to pay taxes on the capital gains.
Tax deductions are the main investment properties tax benefit. You are able to deduct insurance premiums, mortgage loan interest, maintenance expenses, and property taxes. Go over your deductions with a tax professional so you don’t miss anything.
The main benefit of investment property ownership is found in depreciation. The IRS states that all investment property, with the exception of land, depreciates. Personal property, such as the appliances in the home, also depreciate. Residential and commercial properties depreciate at different rates. The former depreciates over 27.5 years while the latter takes 39 years.
When you sell the home for more than you paid, you have capital gains. Some of the depreciation allowed during your ownership is recaptured. You can use an online real estate capital gains calculator to quickly figure out how much money you’ll owe.
The capital gains amount when you sell your property is calculated by taking the difference of the depreciated book value and the price that you got for your home. The amount that you used as tax deductions will be recaptured at the 25% rate. Whatever remains will be taxed at the current capital gains tax rate.
Some of your investment properties tax savings are only for real estate professionals. You do not need a license to be a real estate professional. Instead, it is classified mainly by how much time you spend working in real estate and how involved you are in your investment properties. The first criterion is met by spending 750 hours a year, or half of your working hours, doing real estate activities.
In order to be considered a real estate professional for income tax purposes, you’ll need to materially participate in the management of your invest property, though you are allowed to hire managers for day-to-day activities. Because the tax rules can be complicated and change yearly, it is important to work with a tax professional who specializes in investment properties.