The ultimate guide to rental property tax benefits

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    Investing in high-income real estate is a great way to gain financial independence. It is a form of passive income – after the initial job. First of all, you need to do some research on the rental and property market in your area in order to find the right property at the right price and to set the best investment rate. Once you own the property, you will likely need to do some renovation and strive to find the right tenant. Once you do, you will start earning rental income with the added bonus that your property will appreciate over time.

    Investment real estate has made good returns on your investment in the past, but the coronavirus pandemic has brought rental income to its knees. Mortgage rates are at an all-time low, but unemployment hit an all-time high in 2020. Many Americans are struggling with states imposing eviction moratoriums preventing landlords from evicting renters unable to pay rent due to COVID-19. This puts all of the financial pressure on a property investor who will continue to have to pay a mortgage, taxes, and other related property costs and may not have any income from a tenant.

    Some states, such as California, are calling for the eviction moratoria to be extended until 2021. As an Airbnb host, if you own investment property and are dependent on rental income or vacation rental income, finding ways to make up some of the lost income may be relief . As the tax season approaches and you know what tax breaks are available in the form of credits, deductions, and write-offs, you can at least save money on your upcoming tax bill.

    COVID-19 tax implications for owners of rental properties

    The Federal Tax Cuts and Jobs Act (TCJA) and the Coronavirus Aid, Facilitation and Economic Security Act (CARES) are introducing some changes that rental property owners can use. Here’s a closer look at what to expect when filing rental property taxes for 2020.

    Depreciation

    There are no changes to the types of depreciation you can make on your rental properties. You can still deduct interest, property taxes and improvement costs.

    depreciation

    One of the biggest write-offs for real estate investors is the write-off. You can write off a commercial property over 39 years and a residential property over 27.5 years. If you are a commercial real estate tenant, you can now write off the property faster through a TCJA provision in the CARES Act.

    The provision allows owners to write off the total cost of interior work on a commercial building (QIP) in the year it was put into service, as long as it was between 2018 and 2022. Some QIPs include:

    • Alarms / security systems
    • Fire protection systems
    • Furniture

    This could mean an additional tax break for commercial property owners, but the provision has some limitations. Interior construction, square foot expansion, or the addition or upgrading of elevators or escalators are not qualified interior improvements.

    Passive Loss of Activity (PAL)

    If your rental property was operating at a loss in 2020, passive loss of activity may be possible. PAL deductions are limited and complex – consult a real estate tax advisor about your options. PAL is only available if it goes beyond the other passive income or if you are selling the property.

    In other words, if you have other forms of passive income that are making a profit, such as B. Additional rental properties, you may be able to use PAL. There is one caveat – PAL is not an immediate option. You cannot deduct excess losses in the year they occurred. You need to carry it forward as net operating loss (NOL) in future returns.

    Changes to NOL

    Even if you qualify for passive loss of activity, the loss threshold is usually high. The excess loss you bring forward must be greater than $ 250,000 for a single claimant or $ 500,000 for a married couple claiming together. Fortunately, the CARES law has suspended the threshold for disallowing surpluses for the 2018-2020 tax years. Smaller real estate investors with a single property or those whose losses are below the threshold can now present them as NOL.

    Sharon Winsmith of Winsmith Tax stated, “You may be able to deduct up to $ 25,000 from excess losses if your 2020 tax modified adjusted gross income is $ 100,000 or less. Deduction is subject to an exit if your Modified Adjusted Gross Income is above $ 100,000 and is not available to homeowners with income above $ 150,000. ”

    You can also now repay a NOL for the tax years 2018 to 2020 for five years. Using this strategy, you may be able to get back some of the federal income tax you’ve paid over the past few years.

    Winsmith warns real estate investors about strategic deductions, write-downs, and losses. “The high depreciation and other expenses associated with renting and maintaining the property reduce rental income, but net losses from rental properties can prevent property owners from being classified as active real estate professionals. If you are experiencing excessive losses, you should consult a tax advisor to see if you have any other forms of passive income that these losses could offset. “

    Tax benefits for rental properties

    Some of the changes to depreciation and deduction by CARES laws are complex. Consulting a tax advisor is the best way to explore your options. However, there are other rental property tax benefits that are easier to understand and use. Whether you’re renting out your property to a renter, or renting a room or vacation home as an Airbnb host, there are multiple tax deductions available to you. They include:

    Mortgage rates

    When you have a mortgage on the property you are renting, a significant portion of your monthly payment goes towards interest fees. You can deduct the interest portion of your mortgage interest after calculating the amount found in previous mortgage statements. For example, let’s say you’re paying $ 1,233 per month. The date of receipt of payment will be shown on your bank statement. USD 533 flowed into your capital and USD 700 earned interest. You can write off the $ 700 interest on your taxes.

    Standard cost of ownership

    The costs required to run your rental business are usually tax deductible. Some of the most common deductions are:

    • Business license or other license and permit fees
    • Hosting Fees or Commissions (Airbnb and Vacation Rentals)
    • Insurance premiums
    • Legal fees
    • Maintenance and cleaning fees
    • Marketing fees
    • Office rental
    • Office supplies
    • Payroll
    • Fees (accounting, broker and property management)
    • Repair
    • Travel expenses for the way to the accommodation
    • Utilities paid by the owner

    Tax benefits for real estate investment properties

    All states levy a property tax. You can even pay city and local taxes. All property taxes for your property are also tax deductible. And if you host your house (or a room) as a holiday home, the usage taxes you have paid can also be exempted.

    Married business partners

    If your rental business is robust enough to support you and your spouse, it may be worth putting your spouse on the payroll. Winsmith explains, “It may surprise many landlords to know that they or their spouse can actually make more money if one of them quits their regular job and fully manages the property to qualify as an active real estate professional when the effects of Taxes are taken into account across all sources of income. “

    How to calculate your taxable rental income

    One of the most important aspects of whether your rental property business is in the red or in the black depends on the rental income you calculate and the associated tax liability. Here’s how you can calculate it:

    1. Add up the rental income that you are receiving (or want to receive) for a year.
    2. Add up any annual tax deductible expenses you have. Please see the list above for more information.
    3. Subtract the annual expenses from the annual rental income. Hopefully you have a positive number.
    4. Divide the cost of the property by 27 for residential property and 39 for commercial property to find the annual depreciation allowance you can take.
    5. Subtract the amount from your profit (or loss) based on effort.
    6. The total is a rough estimate of your annual taxable income.

    Depending on the amount of taxable income, your tax rate for the 2020 filing year may vary as follows:

    tax rateSingle filerMarried filing togetherHead of household
    10%Up to $ 9,950Up to $ 19,900Up to $ 14,200
    12%$ 9,951 to $ 40,525$ 19,901 to $ 81,050$ 14,201 to $ 54,200
    22%$ 40,526 to $ 86,375$ 81,051 to $ 172,750$ 54,201 to $ 86,350
    24%$ 86,376 to $ 164,925$ 172,751 to $ 329,850$ 86,351 to $ 164,900
    32%$ 164,926 to $ 209,425$ 329,851 to $ 418,850$ 164,901 to $ 209,400
    35%$ 209,426 to $ 523,600$ 418,851 to $ 628,300$ 209,401 to $ 523,600
    37%About $ 523,600Over $ 628,300About $ 523,600

    COVID-19 resources for landlords

    In addition to tax depreciation and withholding, there are other resources available that can help you get through this unprecedented period.

    Forbearance letter generator

    You may be able to get some relief from your mortgage payments by asking your forbearance at this point. An indulgence pushes back your monthly payments. Most lenders offer some form of leniency to borrowers. In most cases you will have to write a letter of hardship. You can use a template to generate a forbearance letter.

    National Multihousing Council (NMHC)

    The NMHC offers many resources to property owners. Some of the topics available in the knowledge base include COVID-related news and updates, rental trackers, webinars, and tools useful for communicating with tenants.

    SBA disaster relief

    The Small Business Administration provides disaster relief loans that can be used for working capital and to cover business expenses.

    Hello lenderForbearance letter generator
    NMHCTools and trackers for landlords
    SBADisaster Relief COVID-19 Loan

    We appreciate your feedback on this article. Contact us at enquiries@thesimpledollar.com with comments or questions.

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