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Reasons to Invest in a Rental Property...READ MORE BELOW...
Advantages to Owning a Rental Property... DOWN BELOW - EXCELLENT INFORMATION...
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Tax Benefits of Owning Rental Property...
Rental Property Tax Benefits & Deductions...
Rental Property Tax Benefits & Deductions...
''Child tax credit -
''American Opportunity Tax Credit
''Earned Income Tax Credit (EITC)-
''Premium Tax Credit –
Child Tax Credit: Eligibility:
The child tax credit is a tax benefit for people with dependent children under 17. Eligibility depends on filing status, income and the child's relationship to the caregiver. child tax credit on the tax return (Form 1040)
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The child tax credit is a tax benefit for people with dependent children under 17. Eligibility depends on filing status, income and the child's relationship to the caregiver. child tax credit on the tax return (Form 1040)
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How to qualify for the child tax credit...
Generally, there are seven “tests” you and your qualifying child need to pass: age, relationship, dependent status, residency, financial support, citizenship and income.
Age: Your child must have been under the age of 17 at the end of the tax year.
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Relationship: The child you’re claiming must be your son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister or a descendant of any of those people (e.g., a grandchild, niece or nephew).
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Dependent status: You must be able to properly claim the child as a dependent. The child also cannot file a joint tax return, unless they file it to claim a refund of withheld income taxes or estimated taxes paid.
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Residency: The child you’re claiming must have lived with you for at least half the year (there are some exceptions to this rule).
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Financial support: You must have provided at least half of the child’s support during the last year. In other words, if your qualified child financially supported themselves for more than six months, they’re likely considered not qualified.
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Citizenship: Per the IRS, your child must be a "U.S. citizen, U.S. national or U.S. resident alien," and must hold a valid Social Security number.
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Income: Parents or caregivers claiming the credit also typically can’t exceed certain income requirements. Depending on how much your income exceeds that threshold, the credit gets incrementally reduced until it is eliminated.
Generally, there are seven “tests” you and your qualifying child need to pass: age, relationship, dependent status, residency, financial support, citizenship and income.
Age: Your child must have been under the age of 17 at the end of the tax year.
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Relationship: The child you’re claiming must be your son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister or a descendant of any of those people (e.g., a grandchild, niece or nephew).
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Dependent status: You must be able to properly claim the child as a dependent. The child also cannot file a joint tax return, unless they file it to claim a refund of withheld income taxes or estimated taxes paid.
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Residency: The child you’re claiming must have lived with you for at least half the year (there are some exceptions to this rule).
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Financial support: You must have provided at least half of the child’s support during the last year. In other words, if your qualified child financially supported themselves for more than six months, they’re likely considered not qualified.
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Citizenship: Per the IRS, your child must be a "U.S. citizen, U.S. national or U.S. resident alien," and must hold a valid Social Security number.
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Income: Parents or caregivers claiming the credit also typically can’t exceed certain income requirements. Depending on how much your income exceeds that threshold, the credit gets incrementally reduced until it is eliminated.
Additional child tax credit...
If you qualify for the CTC but can't take full advantage because you don't owe taxes or owe less than your credit amount, you may be able to get a partial refund by claiming the additional child tax credit.
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The IRS figures your additional child tax credit amount by multiplying your earned income above $2,500 by 15%. You can claim that number or however much of the CTC credit you were entitled to but couldn’t fully use, whichever number is less. But keep in mind that the maximum refund for the 2024 tax year is capped at $1,700 per qualifying dependent. www.knowledgefinancialgroup.blogspot.com
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If you qualify for the CTC but can't take full advantage because you don't owe taxes or owe less than your credit amount, you may be able to get a partial refund by claiming the additional child tax credit.
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The IRS figures your additional child tax credit amount by multiplying your earned income above $2,500 by 15%. You can claim that number or however much of the CTC credit you were entitled to but couldn’t fully use, whichever number is less. But keep in mind that the maximum refund for the 2024 tax year is capped at $1,700 per qualifying dependent. www.knowledgefinancialgroup.
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Earned Income Tax Credit (EITC)
The Earned Income Tax Credit (EITC) helps low- to moderate-income workers and families get a tax break. If you qualify, you can use the credit to reduce the taxes you owe – and maybe increase your refund.
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The Earned Income Tax Credit (EITC) helps low- to moderate-income workers and families get a tax break. If you qualify, you can use the credit to reduce the taxes you owe – and maybe increase your refund.
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Who qualifies
You may claim the EITC if your income is low- to moderate. The amount of your credit may change if you have children, dependents, are disabled or meet other criteria.
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You may claim the EITC if your income is low- to moderate. The amount of your credit may change if you have children, dependents, are disabled or meet other criteria.
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How to claim the Earned Income Tax Credit (EITC)
To claim the Earned Income Tax Credit (EITC), you must qualify for the credit and file a federal tax return.
To claim the Earned Income Tax Credit (EITC), you must qualify for the credit and file a federal tax return.
Forms to file
You must file Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors.
If you are claiming the credit for a qualifying child, you must also file the Schedule EIC (Form 1040 or 1040-SR), Earned Income Credit with your return.
The Schedule EIC is not required if claiming the credit without a qualifying child.
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You must file Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors.
If you are claiming the credit for a qualifying child, you must also file the Schedule EIC (Form 1040 or 1040-SR), Earned Income Credit with your return.
The Schedule EIC is not required if claiming the credit without a qualifying child.
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The Premium Tax Credit –
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IRS
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ELIGIBILITY:
You are eligible for the premium tax credit if you meet all of the following requirements. You:
- Have household income that falls within a certain range.
- If you, or your spouse (if filing a joint return), received, or is approved to receive, unemployment compensation for any week beginning during 2021, your household income is considered to fall within this range.
- Do not file a tax return using the filing status of Married Filing Separately.
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- There is an exception to this rule that allows certain victims of domestic abuse and spousal abandonment to claim the credit using Married Filing Separately; for more information, see the Premium Tax Credit questions and answers.
- Cannot be claimed as a dependent by another person.
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- Meet these additional requirements: In the same month, you or a family member:
- Have health insurance coverage through a Health Insurance Marketplace for which the share of the premium not covered by advance credit payments is paid by the due date of your return.
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- Are not able to get affordable coverage through an eligible employer-sponsored plan that provides minimum value.
- Are not eligible for coverage through a government program, like Medicaid, Medicare, CHIP or TRICARE.
- WWW.VISIONAIREBIZ.BLOGSPOT.COM
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You are eligible for the premium tax credit if you meet all of the following requirements. You:
- Have household income that falls within a certain range.
- If you, or your spouse (if filing a joint return), received, or is approved to receive, unemployment compensation for any week beginning during 2021, your household income is considered to fall within this range.
- Do not file a tax return using the filing status of Married Filing Separately.
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- There is an exception to this rule that allows certain victims of domestic abuse and spousal abandonment to claim the credit using Married Filing Separately; for more information, see the Premium Tax Credit questions and answers.
- Cannot be claimed as a dependent by another person.
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- Meet these additional requirements: In the same month, you or a family member:
- Have health insurance coverage through a Health Insurance Marketplace for which the share of the premium not covered by advance credit payments is paid by the due date of your return.
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- Are not able to get affordable coverage through an eligible employer-sponsored plan that provides minimum value.
- Are not eligible for coverage through a government program, like Medicaid, Medicare, CHIP or TRICARE.
- WWW.VISIONAIREBIZ.BLOGSPOT.COM
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American Opportunity Tax Credit...
The American opportunity tax credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you.
The amount of the credit is 100 percent of the first $2,000 of qualified education expenses you paid for each eligible student and 25 percent of the next $2,000 of qualified education expenses you paid for that student.
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Who is an eligible student for AOTC?
To be eligible for AOTC, the student must:
- Be pursuing a degree or other recognized education credential,
- Be enrolled at least half time for at least one academic period* beginning in the tax year,
- Not have finished the first four years of higher education at the beginning of the tax year,
- Not have claimed the AOTC or the former Hope credit for more than four tax years, or
- Not have a felony drug conviction at the end of the tax year.
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Be careful claiming the AOTC
Make sure you are qualified before claiming the credit and make sure you keep copies of all the documents you used to find out if you qualify and determine the amount of your credit.
If the IRS audits your return and finds your AOTC claim is incorrect and you don’t have the documents to show you qualified,
- you must pay back the amount of the AOTC you received in error with interest,
- you may also be charged an accuracy or a fraud penalty or
- you can be banned from claiming the AOTC for two to ten years.
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MAGI for most people is the amount of adjusted gross income (AGI), shown on your tax return. If you file Form 1040, you add the following amounts to your AGI:
- Foreign earned income exclusion,
- Foreign housing exclusion,
- Foreign housing deduction,
- Exclusion of income by bona fide residents of American Samoa, or of Puerto Rico.
If you need to adjust your AGI to find your MAGI, there are worksheets in the Publication 970 to help you.
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Make sure you are qualified before claiming the credit and make sure you keep copies of all the documents you used to find out if you qualify and determine the amount of your credit.
If the IRS audits your return and finds your AOTC claim is incorrect and you don’t have the documents to show you qualified,
- you must pay back the amount of the AOTC you received in error with interest,
- you may also be charged an accuracy or a fraud penalty or
- you can be banned from claiming the AOTC for two to ten years.
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MAGI for most people is the amount of adjusted gross income (AGI), shown on your tax return. If you file Form 1040, you add the following amounts to your AGI:
- Foreign earned income exclusion,
- Foreign housing exclusion,
- Foreign housing deduction,
- Exclusion of income by bona fide residents of American Samoa, or of Puerto Rico.
If you need to adjust your AGI to find your MAGI, there are worksheets in the Publication 970 to help you.
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Adjusted Gross Income (AGI)? -
What is modified adjusted gross income (MAGI)
- AGI is calculated by subtracting allowed adjustments from your gross income.
- Above-the-line deductions reduce both AGI and taxable income, increasing tax savings.
- Understanding AGI helps optimize eligibility for various tax benefits and deductions.
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adjusted gross income (AGI)
Before we go any further, there are three key income numbers you should be aware of: gross income, adjusted gross income, and taxable income.
- Gross income refers to the total amount of money you earn in a given year. It includes wages, salaries, tips, self-employment income, investment income, retirement income, and other sources.
- Adjusted gross income is your gross income with a few "adjustments," as the name implies. We'll get into these adjustments in the next section, but it is designed to give a better picture of how much money you made in a year.
- Taxable income takes things a step further and applies any tax deductions to which you are entitled. For example, mortgage interest is a deduction that qualified taxpayers can apply to reduce their taxable income.
For the purposes of income calculations, tax deductions are split into two categories -- adjustments to income and deductions. Adjustments to income are often referred to as "above the line" deductions, or items that can reduce your adjusted gross income
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Before we go any further, there are three key income numbers you should be aware of: gross income, adjusted gross income, and taxable income.
- Gross income refers to the total amount of money you earn in a given year. It includes wages, salaries, tips, self-employment income, investment income, retirement income, and other sources.
- Adjusted gross income is your gross income with a few "adjustments," as the name implies. We'll get into these adjustments in the next section, but it is designed to give a better picture of how much money you made in a year.
- Taxable income takes things a step further and applies any tax deductions to which you are entitled. For example, mortgage interest is a deduction that qualified taxpayers can apply to reduce their taxable income.
For the purposes of income calculations, tax deductions are split into two categories -- adjustments to income and deductions. Adjustments to income are often referred to as "above the line" deductions, or items that can reduce your adjusted gross income
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Adjusted gross income vs. modified adjusted gross income
There's a slightly different version of adjusted gross income known as modified adjusted gross income, or MAGI, which is technically the income number used for certain tax benefits. In a nutshell, MAGI calculations start with your AGI and add back certain deductions, such as student loan interest.
As if this wasn't complex enough already, there is not a single calculation formula for MAGI. The exact calculation procedure depends on which tax benefit it is being calculated for. As an example, if you're trying to determine eligibility for Roth IRA contributions, you'd add back student loan interest, foreign earned income, foreign housing deductions, excluded savings bond interest, and excluded employer adoption benefits (obviously, many of these don't apply to the majority of taxpayers). On the other hand, to determine liability for the net investment income tax, you would only add in the foreign adjustments.
As with AGI, if you use tax software, your MAGI for each tax subject will be calculated for you, so there's no need to know the individual requirements. The key takeaway is simply that certain tax benefits and qualifications use a slightly different version of AGI.
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There's a slightly different version of adjusted gross income known as modified adjusted gross income, or MAGI, which is technically the income number used for certain tax benefits. In a nutshell, MAGI calculations start with your AGI and add back certain deductions, such as student loan interest.
As if this wasn't complex enough already, there is not a single calculation formula for MAGI. The exact calculation procedure depends on which tax benefit it is being calculated for. As an example, if you're trying to determine eligibility for Roth IRA contributions, you'd add back student loan interest, foreign earned income, foreign housing deductions, excluded savings bond interest, and excluded employer adoption benefits (obviously, many of these don't apply to the majority of taxpayers). On the other hand, to determine liability for the net investment income tax, you would only add in the foreign adjustments.
As with AGI, if you use tax software, your MAGI for each tax subject will be calculated for you, so there's no need to know the individual requirements. The key takeaway is simply that certain tax benefits and qualifications use a slightly different version of AGI.
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What is modified adjusted gross income (MAGI)
It’s likely Modified Adjusted Gross income is one of those tax terms you’ve encountered. Modified Adjusted Gross Income (MAGI) in the simplest terms is your Adjusted Gross Income (AGI) plus a few items—like exempt or excluded income and certain deductions. The Internal Revenue Service (IRS) uses your MAGI to determine your eligibility for certain tax deductions, credits, and retirement savings plans. MAGI can vary depending on the tax benefit.
It’s likely Modified Adjusted Gross income is one of those tax terms you’ve encountered. Modified Adjusted Gross Income (MAGI) in the simplest terms is your Adjusted Gross Income (AGI) plus a few items—like exempt or excluded income and certain deductions. The Internal Revenue Service (IRS) uses your MAGI to determine your eligibility for certain tax deductions, credits, and retirement savings plans. MAGI can vary depending on the tax benefit.
Modified Adjusted Gross Income (MAGI) matter?
Income limits apply to common tax breaks. MAGI, in particular, is used to determine eligibility for several tax-related benefits, including:
- Roth IRA contributions: Retirement contribution (income) limits to a Roth retirement account are based on your MAGI. (Related: Learn about how Roth IRAs are taxed.)
- Deductibility of retirement contributions made to a Traditional IRA: If you or your spouse are covered by a retirement plan at work, your MAGI will determine your eligibility and amount. (Related: Rules for Roth and Traditional IRA contributions.)
- Tax credits: MAGI is used to determine eligibility for education tax credits, the Premium Tax Credit, and the Child Tax Credit.
- Net Investment Income Tax: Net Investment Income Tax (NIIT) is a tax imposed on certain types of investment income for individuals, estates, and trusts. Whether your investment income is subject to NIIT depends on if your MAGI exceeds the $200,000 ($250,000 for joint filers) threshold.
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ANTHONY JEANTY, @ 305-784-6554 - www.knowledegefinancial.blogspot.com------ DIGITAL CREATOR - CONTENT CREATOR = Tax Consultant Of South Florida, ---- call Anthony @ 305-784-6554 - Miami Dade, Broward, Palm beach county. Tax------ Preparation, Get It Done Right... FIRST CLASS CAN HELP! 12944 West Dixie HWY, North Miami Florida, = CONTACT ANTONY@ 305-784-6554 - www.visionoeholding.blogspot.com-------'' FASTER, BETTER, STRESS FREE REFUND'' www.knowledegefinancial.blogspot.com----'' Accurate, Efficient Tax Return And Reliable Service - www.visiononecapital.blogspot.com----'' You can count on us for professional service, '' SOUTH FL. - CONTACT US @ 305-784-6554 - www.moneywisers.blogspot.com==============
ANTHONY JEANTY DIGITAL CREATOR - CONTENT CREATOR FOR: KNOWLEDGE FINANCIAL GROUP - http://WWW.KNOWLEDGEFINANCIALGROUP.COM-----Financial Literacy Matters..------DIGITAL CREATOR - CONTENT CREATOR FOR: --------Financial literacy is crucial for helping consumers to manage their own money.-------===========ANTHONY JEANTY, CONTENT CREATOR FOR: VISIONONE REALESTATE INVESTMENT GROUP - ------ How To Improve Your Finance And Increase Your Income Through Real Estate-----==============
Reasons to Invest in a Rental Property...
A world of upside
Many people do quite well for themselves by investing in real estate -- specifically, by owning rental properties. Holding rental properties isn't for everyone. But here's how it might benefit you.
In addition to owning a family home, you can build a stronger financial foundation by strategically investing in rental properties that bring in monthly income, grow in value over time, and help you save on taxes.Steady Income Stream
One of the primary benefits of buying rental properties is the steady income stream. It can be a great source of passive income. The operative word in that last sentence is “can” because the stream of rental income will run dry if tenants don’t pay up on time or at all.
That’s one reason many investment property owners hire property management firms close to their rental properties.
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An experienced property manager can help you screen tenants, prepare rental units, advertise vacant units, collect rent, find contractors for maintenance and repairs, source quality materials for upkeep, provide customer service to tenants, and more.
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Tax Advantages
Another benefit of owning rental properties is that you can enjoy tax benefits. And who doesn’t want to slash the amount they pay in tax?
According to the IRS, you can deduct some rental expenses when filing for taxes if you receive rental income. Such things include mortgage interest, repairs, operating costs, and depreciation.
Working with a certified public accountant to maximize your tax advantages is a good idea. Going that route can also help you avoid mistakes that get you in trouble with the government.
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Long-Term Asset Appreciation
Yet another good reason to purchase rental properties is the potential for long-term asset appreciation. Realtor.com says that since 1975, the average decade-long return on home prices in the U.S. has been 57%.
Many factors come into play when looking at real estate values. But if you buy a good property in a good area, find good tenants with the help of a property management firm that can screen applicants, and maintain your property, your odds of getting a good ROI will skyrocket.
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Diversification of Investments
When investing in a rental property, you’ll essentially diversify your investments. Saving money in a high-interest account is great. But that’s not enough for substantial wealth generation.
In addition to investing in stocks, ETFs, real estate investment trusts, bonds, and mutual funds, consider getting into real estate. Owning a family home is a good thing for you and yours, but you can get even further ahead by investing in one or more rental properties.
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Generational Wealth
If your goal is to create generational wealth, you can hand down to your offspring, owning rental properties is one way to help you get there. The properties will potentially expand exponentially in value over years or decades. You’ll want to sit down with a lawyer or estate planning expert to put in place your strategy to pass on generational wealth in a tax-effective way when the time comes.
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Advantages to Owning a Rental Property...
You can create a passive income stream
If you buy a rental property in the right market, you may find it easy to keep it occupied. The result? Steady rental income you can rely on. Even if you opt to rent your home short-term, you might still find that it serves as a solid source of passive income.
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You can reap some tax breaks
When you own a rental property, certain costs you incur are tax-deductible. Those could help offset your IRS bill and help you maximize your profits. That said, it's a good idea to sit down with a tax professional once you purchase a rental property, so you can strategize on how to benefit.
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Your property could gain a lot of value over time
Homes have a tendency to appreciate in value over time. If you hold your rental property for many years, you might be able to sell it at a nice profit. And that money could do a lot for you, such as help fund your retirement or allow you to meet other goals.
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You can tap your property's equity as needed
When you own a home, you have equity in it and have the option to borrow against it. If a need for money arises, you can take out a home equity loan or line of credit to access the cash you need. Often, that's a fairly affordable way to borrow.
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You'll have access to a potential vacation home
If you have a short-term rental, you don't have to fill it with tenants all the time. Rather, you can choose to use that space for your own benefit when you're ready for an escape from the grind. If you own a rental near a beach, lake, or other desirable areas, it can serve as your personal getaway when you want it to.
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You can diversify your investment portfolio
Right now, stocks are down, but home values are up. And so, investors who own both aren't feeling the same pain as investors who have money solely in stocks. That's the beauty of owning a rental property -- it's another type of investment that might perform well when your other assets have lost value.
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You can reap all the benefits without doing the work
Owning a rental home does take work. But you don't have to do that work yourself. If you hire a property manager, you can benefit from a steady income stream without having to spend your own time dealing with tenant issues, maintenance, and repairs.
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You'll have a valuable asset to gift to your heirs
You may have children or grandchildren you're hoping to take care of financially. If you own a rental property, that home might gain a lot of value through the years. And if you reach a point where you no longer need the income yourself, you can pass that home on to your loved ones.
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INCOME TAX KNOWLEDGE: www.bytheremarket.com - Tax Consultant Of South Florida, call Anthony @ 305-784-6554 - Miami Dade, broward, palm beach county. Tax Preparation, Get It Done Right... FIRST CLASS CAN HELP! ---- 12944 West Dixie HWY, North Miami Florida, = CONTACT ANTONY@ 305-784-6554 - www.visionoeholding.blogspot.com-------'' FASTER, BETTER, STRESS FREE REFUND'' www.knowledegefinancial.blogspot.com----'' Accurate, Efficient Tax Return And Reliable Service - www.visiononecapital.blogspot.com----'' You can count on us for professional service, '' SOUTH FL. - CONTACT US @ 305-784-6554 - www.moneywisers.blogspot.com========ANTHONY JEANTY, CONTENT CREATOR FOR...
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Tax Benefits of Owning Rental Property...
Rental Property Tax Benefits & Deductions
There are several tax benefits and deductions available to rental investors and property owners. They include the following:
By now, you should know the rental property tax benefits you qualify for and how you can deduct them to improve your bottom line. Landlords who fail to take advantage of these tax deductions end up paying more than they need to and earning less than they should. However, it helps to work with a registered tax consultant, so you can get the information and assistance you need.
If you’re looking to start investing in real estate, then CONTACT ANTHONY JEANTY @ 305-784-6554 - SOUTH FLORIDA, WE ARE TO HELP - WE ARE TO SERVE!
Rental Property Tax Benefits & Deductions
There are several tax benefits and deductions available to rental investors and property owners. They include the following:
Deductible Operating Expenses
Operating expenses are the recurring costs of running a business. They are the costs associated with the operation and general maintenance of a rental property.
You can deduct expenses related to managing and maintaining a rental property. According to the Internal Revenue Service, these expenses are considered ordinary and necessary for conserving and maintaining the property. These expenses are broker fees, utilities, advertising costs, maintenance expenses, property management fees, lawn care, service fees, and taxes.
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Depreciation Deduction
Depreciation is the reduction in the value of property due to wear and tear, over time. According to the IRS, Depreciation is an annual income tax deduction that allows you to recover the cost basis of a property over time.
This depreciation expense is not deducted at once but over a period of time. This period amounts to 39 years for commercial real estate and 27.5 years for residential rental properties.
Since land doesn’t depreciate, the depreciation expense only includes the cost of the house and improvements in the home that can be affected by wear and tear. This includes roofing, fencing, home additions, HVAC systems, and other similar items. For example, if you purchase a property for $500,000 and the lot is valued at $80,000, the cost basis of the property adjusted for depreciation is $420,000.
Assuming you added a garage at an expense of $30,000 and installed a brand-new roof for $15,000. Your property’s cost basis would be adjusted for those improvements and would total $465,000. That would yield an annual depreciation expense of about $16,900 (over 27.5 years).
IRS rules for rental property state that a replacement roof’s cost depreciates for the same amount of time as the property, while appliances depreciate over five years. Depreciation commences on a property as soon as it is either placed in service or ready to be rented out.
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Mortgage Interest Deduction
This is most likely the largest deduction homeowners can receive on their property. According to the Tax Cuts and Jobs Act (TCJA) of 2017, homeowners can now receive a tax reduction on the mortgage interest paid on home loans up to $750,000 (previously $1 million).
The interest on home equity loans is deductible as long as the borrowed funds are used to buy or improve your home. Landlords can also deduct the interest on credit cards for goods or services used in running their business, as this is qualified as “business credit.” For this reason, investors should have a separate business credit card.
When a property owner refinances a property for more than it is currently worth, they can deduct the interest. This is if the revised terms are intended for the improvement or maintenance of the property.
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#4 - Deductible Travel Fees
Travel expenses are another deduction real estate investors are entitled to. You can deduct most travel expenses, including vehicle expenses, airfare, lodging, and meals. However, they must meet the guidelines laid out in IRS Publication 463:
- According to the IRS, travel expenses are costs incurred while you’re away from your tax home. Your tax home is defined as your regular office where you work, most of the time.
- The trip must be for business reasons. It may have a secondary personal purpose but it should mainly be for business.
- Meals that aren’t considered lavish are deductible travel expenses.
- In order to qualify for the deduction, a business expense must be deemed ordinary and necessary (O & NE)
For meals, you can deduct a standard meal allowance instead of the actual cost of the daily meals. This allowance tends to vary from state to state. You can check the IRS website for the standard rates.
Also, you may be able to deduct vehicle expenses used in operating and maintaining your car when traveling to the property. For instance, driving to the rental property to collect rent or repair an appliance is considered a deductible travel expense.
There are two ways you can deduct travel expenses. You can deduct the actual expenses if you recorded them or the standard mileage rate plus parking fees and tolls. For 2022, the standard mileage rate is 58.5 cents per mile.
You are allowed to use the standard mileage rate if you drive less than five cars for your business operations. You apply it in the first year of using a car for your real estate business.
---------
#5 - 20% Pass-Through Income Deduction
Investors who own pass-through businesses and have positive taxable income are qualified to have up to a 20% pass-through deduction (qualified business deduction) on their tax returns.
Pass-through, in this sense, means that the profits and losses incurred in the operation of the business, are distributed to the individual owners of the businesses who then pay taxes at individual tax rates. Pass-through businesses include sole proprietorships, partnerships, LLCs, and S Corporations.
For instance, an investor who owns several condos in a business he runs by himself. If he turns in $100,000 every year, he will be able to write off 20%, i.e. $20,000, of that income on his tax return as a pass-through deduction.
With the Tax Cuts and Jobs Act (TCJA) that took effect in 2018, owners of pass-through businesses who qualify can receive up to a 20% deduction of their total business income from their income taxes. Investors must own a pass-through business and must have qualified business income (QBI) to qualify for the deduction.
QBI represents the net profit earned by a pass-through business. However, QBI excludes capital gains, dividends, and interest.
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#6 - No FICA Taxes
Federal Insurance Contributions Act (FICA) taxes, also called payroll taxes, is a United States payroll tax deducted from both employees’ and employers’ salaries to fund the Social Security and Medicare programs. Self-employed taxpayers are usually required to pay both the employer and the employee portion of the FICA tax – about 15.3% in total (for 2021). Social Security taxes are paid on up to $147,000 of your total income, and you pay Medicare taxes on all of your combined earnings.
However, rental income is not subject to FICA tax, since it is not legally classified as earned income. For example, if Jane runs a freelance business and earns $120,000 annually, she would be required to pay a payroll tax of 15.3% or $18,360. But, if that income was received from a rental business, she would not be liable for a payroll tax.
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#7 - Deductible Legal Fees
In the event of evictions or legal disputes, you can also deduct legal fees such as payments to real estate attorneys and court fees. These fees are considered operating expenses and can be deducted as long as they are related to your real estate business.
These can either be classified as facilitative costs (that is amounts paid to facilitate the acquisition of a real property or a business) or investigatory costs (paid in the process of performing due diligence on the property). These costs can also include appraisal fees, title fees, and the cost of obtaining regulatory approval as long as they are directly related to your real estate business operations.
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#8 - Home Office Deduction
If you run your business from home, you might qualify for a deduction due to what the IRS calls “business use of your home.” Also, according to the IRS, the term “home” may be a house, boat, apartment, condo, or similar property as long as it provides basic living accommodations.
There are three requirements you need to meet before you can be considered for a home office deduction:
- Regular Use. You must have a designated area in your home to conduct business.
- Trade or Business Use. Your activities in this area should be related to an established trade or business.
- Principal Place of Business. Your home must be your primary workplace to conduct activities related to your business.
If you’re eligible for this deduction, you should be able to deduct most of your home expenses, including rent, repairs, utilities, telephone charges, mortgage interest, and real estate taxes. You can choose to use either the Simplified Method or actual expenses. You are allowed this deduction, regardless of whether you own the workplace or you rented it.
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#9 - Defer Capital Gains Tax
Real estate inventors are permitted to defer paying capital gains tax and depreciation recapture on the sale of a rental property by performing a Section 1031 exchange.
Ordinarily, on the sale of a property, the amount of profit you made on your property due to depreciation is taxed as depreciation recapture. Depreciation recapture is taxed at a maximum rate of 25%.
Also, you are required to pay a long-term capital gains tax (usually 15-20%) on your profit from the sale. If you hold the property for less than a year, you are instead charged at the ordinary income tax rate (up to 37%).
For this reason, investors often opt for a 1031 exchange to defer taxes for a later time. A 1031 exchange involves a swap of an investment property for another to defer capital taxes. The process of a 1031 exchange can be complicated and you should hire a professional to walk you through it. You can learn more about 1031 exchanges here.
The properties must be of “like-kind”, i.e of a similar nature and intended for the same purpose.
There is no limit on how often you can conduct 1031 exchanges. So, it is possible to defer capital gains and depreciation taxes indefinitely.
However, taxes will have to be paid at some point, except in the case of inheritance where a stepped up tax basis is used.
---------
#10 - Medical Home Improvement Deductions
Homeowners are also allowed to deduct home improvements made for health reasons. Home improvements that are made to provide medical care for house residents are considered medical expenses and are deductible. These improvements may include fire alarms and warning systems modifications, entrance, and exit ramps, installation of railings in bathrooms, and stairway modifications.
To qualify for this deduction, you need to be able to prove that a resident requires those improvements. You’ll have to itemize and ensure that you deduct only medical expenses that are more than 7.5% of your adjusted gross income (for 2022). Also, you’re required to subtract the increase in the value of your home from your deduction.
As an example, let’s say you install porch lifts in your home to provide accessibility and spend $5000 in total. If it increases your home’s value by $2000, you can only deduct $3000.
Claiming this deduction can be a tad tricky, so it might be helpful to work with someone who’s licensed and experienced.
Note that homeowner’s insurance and private mortgage insurance are not tax-deductible at the moment.
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Income limits apply to common tax breaks. MAGI, in particular, is used to determine eligibility for several tax-related benefits, including:
- Roth IRA contributions: Retirement contribution (income) limits to a Roth retirement account are based on your MAGI. (Related: Learn about how Roth IRAs are taxed.)
- Deductibility of retirement contributions made to a Traditional IRA: If you or your spouse are covered by a retirement plan at work, your MAGI will determine your eligibility and amount. (Related: Rules for Roth and Traditional IRA contributions.)
- Tax credits: MAGI is used to determine eligibility for education tax credits, the Premium Tax Credit, and the Child Tax Credit.
- Net Investment Income Tax: Net Investment Income Tax (NIIT) is a tax imposed on certain types of investment income for individuals, estates, and trusts. Whether your investment income is subject to NIIT depends on if your MAGI exceeds the $200,000 ($250,000 for joint filers) threshold.
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Reasons to Invest in a Rental Property...
A world of upside
Many people do quite well for themselves by investing in real estate -- specifically, by owning rental properties. Holding rental properties isn't for everyone. But here's how it might benefit you.
Steady Income Stream
One of the primary benefits of buying rental properties is the steady income stream. It can be a great source of passive income. The operative word in that last sentence is “can” because the stream of rental income will run dry if tenants don’t pay up on time or at all.
That’s one reason many investment property owners hire property management firms close to their rental properties.
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An experienced property manager can help you screen tenants, prepare rental units, advertise vacant units, collect rent, find contractors for maintenance and repairs, source quality materials for upkeep, provide customer service to tenants, and more.
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Tax Advantages
Another benefit of owning rental properties is that you can enjoy tax benefits. And who doesn’t want to slash the amount they pay in tax?
According to the IRS, you can deduct some rental expenses when filing for taxes if you receive rental income. Such things include mortgage interest, repairs, operating costs, and depreciation.
Working with a certified public accountant to maximize your tax advantages is a good idea. Going that route can also help you avoid mistakes that get you in trouble with the government.
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Long-Term Asset Appreciation
Yet another good reason to purchase rental properties is the potential for long-term asset appreciation. Realtor.com says that since 1975, the average decade-long return on home prices in the U.S. has been 57%.
Many factors come into play when looking at real estate values. But if you buy a good property in a good area, find good tenants with the help of a property management firm that can screen applicants, and maintain your property, your odds of getting a good ROI will skyrocket.
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Diversification of Investments
When investing in a rental property, you’ll essentially diversify your investments. Saving money in a high-interest account is great. But that’s not enough for substantial wealth generation.
In addition to investing in stocks, ETFs, real estate investment trusts, bonds, and mutual funds, consider getting into real estate. Owning a family home is a good thing for you and yours, but you can get even further ahead by investing in one or more rental properties.
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Generational Wealth
If your goal is to create generational wealth, you can hand down to your offspring, owning rental properties is one way to help you get there. The properties will potentially expand exponentially in value over years or decades. You’ll want to sit down with a lawyer or estate planning expert to put in place your strategy to pass on generational wealth in a tax-effective way when the time comes.
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Advantages to Owning a Rental Property...
You can create a passive income stream
If you buy a rental property in the right market, you may find it easy to keep it occupied. The result? Steady rental income you can rely on. Even if you opt to rent your home short-term, you might still find that it serves as a solid source of passive income.
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You can reap some tax breaks
When you own a rental property, certain costs you incur are tax-deductible. Those could help offset your IRS bill and help you maximize your profits. That said, it's a good idea to sit down with a tax professional once you purchase a rental property, so you can strategize on how to benefit.
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Your property could gain a lot of value over time
Homes have a tendency to appreciate in value over time. If you hold your rental property for many years, you might be able to sell it at a nice profit. And that money could do a lot for you, such as help fund your retirement or allow you to meet other goals.
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You can tap your property's equity as needed
When you own a home, you have equity in it and have the option to borrow against it. If a need for money arises, you can take out a home equity loan or line of credit to access the cash you need. Often, that's a fairly affordable way to borrow.
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You'll have access to a potential vacation home
If you have a short-term rental, you don't have to fill it with tenants all the time. Rather, you can choose to use that space for your own benefit when you're ready for an escape from the grind. If you own a rental near a beach, lake, or other desirable areas, it can serve as your personal getaway when you want it to.
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You can diversify your investment portfolio
Right now, stocks are down, but home values are up. And so, investors who own both aren't feeling the same pain as investors who have money solely in stocks. That's the beauty of owning a rental property -- it's another type of investment that might perform well when your other assets have lost value.
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You can reap all the benefits without doing the work
Owning a rental home does take work. But you don't have to do that work yourself. If you hire a property manager, you can benefit from a steady income stream without having to spend your own time dealing with tenant issues, maintenance, and repairs.
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You'll have a valuable asset to gift to your heirs
You may have children or grandchildren you're hoping to take care of financially. If you own a rental property, that home might gain a lot of value through the years. And if you reach a point where you no longer need the income yourself, you can pass that home on to your loved ones.
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Tax Benefits of Owning Rental Property...
Rental Property Tax Benefits & Deductions
There are several tax benefits and deductions available to rental investors and property owners. They include the following:
By now, you should know the rental property tax benefits you qualify for and how you can deduct them to improve your bottom line. Landlords who fail to take advantage of these tax deductions end up paying more than they need to and earning less than they should. However, it helps to work with a registered tax consultant, so you can get the information and assistance you need.
If you’re looking to start investing in real estate, then CONTACT ANTHONY JEANTY @ 305-784-6554 - SOUTH FLORIDA, WE ARE TO HELP - WE ARE TO SERVE!
Rental Property Tax Benefits & Deductions
There are several tax benefits and deductions available to rental investors and property owners. They include the following:
Deductible Operating Expenses
Operating expenses are the recurring costs of running a business. They are the costs associated with the operation and general maintenance of a rental property.
You can deduct expenses related to managing and maintaining a rental property. According to the Internal Revenue Service, these expenses are considered ordinary and necessary for conserving and maintaining the property. These expenses are broker fees, utilities, advertising costs, maintenance expenses, property management fees, lawn care, service fees, and taxes.
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Depreciation Deduction
Depreciation is the reduction in the value of property due to wear and tear, over time. According to the IRS, Depreciation is an annual income tax deduction that allows you to recover the cost basis of a property over time.
This depreciation expense is not deducted at once but over a period of time. This period amounts to 39 years for commercial real estate and 27.5 years for residential rental properties.
Since land doesn’t depreciate, the depreciation expense only includes the cost of the house and improvements in the home that can be affected by wear and tear. This includes roofing, fencing, home additions, HVAC systems, and other similar items. For example, if you purchase a property for $500,000 and the lot is valued at $80,000, the cost basis of the property adjusted for depreciation is $420,000.
Assuming you added a garage at an expense of $30,000 and installed a brand-new roof for $15,000. Your property’s cost basis would be adjusted for those improvements and would total $465,000. That would yield an annual depreciation expense of about $16,900 (over 27.5 years).
IRS rules for rental property state that a replacement roof’s cost depreciates for the same amount of time as the property, while appliances depreciate over five years. Depreciation commences on a property as soon as it is either placed in service or ready to be rented out.
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Mortgage Interest Deduction
This is most likely the largest deduction homeowners can receive on their property. According to the Tax Cuts and Jobs Act (TCJA) of 2017, homeowners can now receive a tax reduction on the mortgage interest paid on home loans up to $750,000 (previously $1 million).
The interest on home equity loans is deductible as long as the borrowed funds are used to buy or improve your home. Landlords can also deduct the interest on credit cards for goods or services used in running their business, as this is qualified as “business credit.” For this reason, investors should have a separate business credit card.
When a property owner refinances a property for more than it is currently worth, they can deduct the interest. This is if the revised terms are intended for the improvement or maintenance of the property.
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#4 - Deductible Travel Fees
Travel expenses are another deduction real estate investors are entitled to. You can deduct most travel expenses, including vehicle expenses, airfare, lodging, and meals. However, they must meet the guidelines laid out in IRS Publication 463:
- According to the IRS, travel expenses are costs incurred while you’re away from your tax home. Your tax home is defined as your regular office where you work, most of the time.
- The trip must be for business reasons. It may have a secondary personal purpose but it should mainly be for business.
- Meals that aren’t considered lavish are deductible travel expenses.
- In order to qualify for the deduction, a business expense must be deemed ordinary and necessary (O & NE)
For meals, you can deduct a standard meal allowance instead of the actual cost of the daily meals. This allowance tends to vary from state to state. You can check the IRS website for the standard rates.
Also, you may be able to deduct vehicle expenses used in operating and maintaining your car when traveling to the property. For instance, driving to the rental property to collect rent or repair an appliance is considered a deductible travel expense.
There are two ways you can deduct travel expenses. You can deduct the actual expenses if you recorded them or the standard mileage rate plus parking fees and tolls. For 2022, the standard mileage rate is 58.5 cents per mile.
You are allowed to use the standard mileage rate if you drive less than five cars for your business operations. You apply it in the first year of using a car for your real estate business.
---------
#5 - 20% Pass-Through Income Deduction
Investors who own pass-through businesses and have positive taxable income are qualified to have up to a 20% pass-through deduction (qualified business deduction) on their tax returns.
Pass-through, in this sense, means that the profits and losses incurred in the operation of the business, are distributed to the individual owners of the businesses who then pay taxes at individual tax rates. Pass-through businesses include sole proprietorships, partnerships, LLCs, and S Corporations.
For instance, an investor who owns several condos in a business he runs by himself. If he turns in $100,000 every year, he will be able to write off 20%, i.e. $20,000, of that income on his tax return as a pass-through deduction.
With the Tax Cuts and Jobs Act (TCJA) that took effect in 2018, owners of pass-through businesses who qualify can receive up to a 20% deduction of their total business income from their income taxes. Investors must own a pass-through business and must have qualified business income (QBI) to qualify for the deduction.
QBI represents the net profit earned by a pass-through business. However, QBI excludes capital gains, dividends, and interest.
---------
#6 - No FICA Taxes
Federal Insurance Contributions Act (FICA) taxes, also called payroll taxes, is a United States payroll tax deducted from both employees’ and employers’ salaries to fund the Social Security and Medicare programs. Self-employed taxpayers are usually required to pay both the employer and the employee portion of the FICA tax – about 15.3% in total (for 2021). Social Security taxes are paid on up to $147,000 of your total income, and you pay Medicare taxes on all of your combined earnings.
However, rental income is not subject to FICA tax, since it is not legally classified as earned income. For example, if Jane runs a freelance business and earns $120,000 annually, she would be required to pay a payroll tax of 15.3% or $18,360. But, if that income was received from a rental business, she would not be liable for a payroll tax.
---------
#7 - Deductible Legal Fees
In the event of evictions or legal disputes, you can also deduct legal fees such as payments to real estate attorneys and court fees. These fees are considered operating expenses and can be deducted as long as they are related to your real estate business.
These can either be classified as facilitative costs (that is amounts paid to facilitate the acquisition of a real property or a business) or investigatory costs (paid in the process of performing due diligence on the property). These costs can also include appraisal fees, title fees, and the cost of obtaining regulatory approval as long as they are directly related to your real estate business operations.
---------
#8 - Home Office Deduction
If you run your business from home, you might qualify for a deduction due to what the IRS calls “business use of your home.” Also, according to the IRS, the term “home” may be a house, boat, apartment, condo, or similar property as long as it provides basic living accommodations.
There are three requirements you need to meet before you can be considered for a home office deduction:
- Regular Use. You must have a designated area in your home to conduct business.
- Trade or Business Use. Your activities in this area should be related to an established trade or business.
- Principal Place of Business. Your home must be your primary workplace to conduct activities related to your business.
If you’re eligible for this deduction, you should be able to deduct most of your home expenses, including rent, repairs, utilities, telephone charges, mortgage interest, and real estate taxes. You can choose to use either the Simplified Method or actual expenses. You are allowed this deduction, regardless of whether you own the workplace or you rented it.
----------
#9 - Defer Capital Gains Tax
Real estate inventors are permitted to defer paying capital gains tax and depreciation recapture on the sale of a rental property by performing a Section 1031 exchange.
Ordinarily, on the sale of a property, the amount of profit you made on your property due to depreciation is taxed as depreciation recapture. Depreciation recapture is taxed at a maximum rate of 25%.
Also, you are required to pay a long-term capital gains tax (usually 15-20%) on your profit from the sale. If you hold the property for less than a year, you are instead charged at the ordinary income tax rate (up to 37%).
For this reason, investors often opt for a 1031 exchange to defer taxes for a later time. A 1031 exchange involves a swap of an investment property for another to defer capital taxes. The process of a 1031 exchange can be complicated and you should hire a professional to walk you through it. You can learn more about 1031 exchanges here.
The properties must be of “like-kind”, i.e of a similar nature and intended for the same purpose.
There is no limit on how often you can conduct 1031 exchanges. So, it is possible to defer capital gains and depreciation taxes indefinitely.
However, taxes will have to be paid at some point, except in the case of inheritance where a stepped up tax basis is used.
---------
#10 - Medical Home Improvement Deductions
Homeowners are also allowed to deduct home improvements made for health reasons. Home improvements that are made to provide medical care for house residents are considered medical expenses and are deductible. These improvements may include fire alarms and warning systems modifications, entrance, and exit ramps, installation of railings in bathrooms, and stairway modifications.
To qualify for this deduction, you need to be able to prove that a resident requires those improvements. You’ll have to itemize and ensure that you deduct only medical expenses that are more than 7.5% of your adjusted gross income (for 2022). Also, you’re required to subtract the increase in the value of your home from your deduction.
As an example, let’s say you install porch lifts in your home to provide accessibility and spend $5000 in total. If it increases your home’s value by $2000, you can only deduct $3000.
Claiming this deduction can be a tad tricky, so it might be helpful to work with someone who’s licensed and experienced.
Note that homeowner’s insurance and private mortgage insurance are not tax-deductible at the moment.
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