Owning a rental property has its positives and negatives. Dealing with less-than-stellar tenants who don’t pay on time or trash your property can be a pain, but the tax incentives that are associated with this type of investment can often make it worth any headache that you come across. Real estate has always been a popular investment and the favorable tax regulations are one of the reasons why.
As with traditional real estate property, owning rental property allows you to deduct the real estate taxes as well as the interest on the mortgage. One difference is if you pay mortgage points. With rental property, these must be amortized over the entire loan term.
Being a landlord means that you will have operating expenses over the year, and these can all be deducted from your taxes. These include insurance, utilities, maintenance and repair, association fees, landscape needs, and more.
A big plus in terms of rental property is that depreciation occurs over 27.5 years for residential buildings. This happens even when your property increases in value. For example, a property that cost $200,000 would have a yearly depreciation deduction of over $7,000. This is cash flow that you can use and it doesn’t count towards your income. If you own commercial property, there is a 39 year depreciation period, but it still helps with your cash flow.
Tax Benefits for the Seller
When you sell the property, you will owe a fairly high tax rate on the profit if you have owned it for a year or more, but there are ways that you can put off paying that amount. The appreciation on rental property is not taxed until it is actually sold. This can result in compound tax-deferred growth, which is great for investors. You can also spread out the taxable gain by taking a note back for a portion of the transaction. You can also indefinitely defer paying taxes by making like-kind exchanges and exchanging your property for a different property.