In the realm of government and business, there are few things more complicated than the tax code. Its ramifications are pervasive, and often determine what type of business you set up. Particularly as concerns rental properties, where there are potential tax breaks on attributes such as depreciation and county of residence.
Understanding Tax on Rental Properties
It behooves you to first understand how the IRS views the rental income you receive from tenants. Understandably, it counts as income. This means that the exact percentage depends on just how much you get – this places you in the appropriate tax bracket.
As you become more well-versed in the ins and outs of multifamily residential real estate, you will learn that there is a myriad of ways to decrease the income tax burden. In fact, real experts end up paying no income tax on rental properties at all! Some even “get money back”, in a sense. If you can show that you take a net loss on rental property income, for example.
What Are Some Deductions for Rental Properties
The part above probably got you excited, at the prospect of being able to dramatically lower your rental property tax income. There are many expenses that the IRS allows to be offset against income. These include mortgage interest, any payments you have to make to the property manager, insurance costs, legal costs related to property ownership, janitorial costs, and more. Tallying all of these together can lead to a significant reduction in rental income; you only have to pay taxes on the result after subtracting these costs.
As an example to close out this summary, let’s say you take in $30,000 in rental income – the total payment from your tenants. Now, we’ll make some subtractions of common liabilities. There is interest on the mortgage you took out on the property, there’s insurance, property management (including janitorial), and any other expenses that you pay out-of-pocket. These total $20,000; which means that you take home $10,000. The taxes you pay are only on that amount.
Contact us at Progressive Capital Funding to learn more about even more tax breaks on rental properties. We’re finance experts in all things business and taxes.