Renting out a property can be a great way to generate passive income, and it can also have some tax benefits. Owning rental property can be a lucrative investment, but it's important to be aware of the tax implications. According to Jason Kuennen, a tax planning specialist at Tax Planning Solutions, here are a few of the ways that rentals can provide tax benefits:
Deductible expenses: As a landlord, you can deduct a variety of expenses related to your rental property on your tax return. These can include things like mortgage interest, property taxes, insurance, and repairs. For example, if you have a mortgage on your rental property, you can deduct the interest you pay on the loan. This can be a significant savings, especially if you have a high mortgage rate. Property taxes and insurance premiums can also be deductible. If you make any repairs to the property, such as fixing a leaky roof or replacing a broken window, you can also deduct these expenses.
Depreciation: The IRS allows landlords to claim depreciation on their rental property. According to Jason Kuennen, this means that you can write off a portion of the cost of the property over a number of years. The exact amount of depreciation you can claim depends on the type of property you own and how it is used. For example, residential rental property is typically depreciated over 27.5 years, while commercial property is typically depreciated over 39 years. Depreciation can be a valuable tax benefit, especially for landlords who have recently purchased a property and are still paying off the mortgage.
Passive income: Rentals can provide passive income, which is income that you earn without actively working for it. This means that you can earn money from your rental property without having to put in the same level of time and effort as you would with a traditional job. Passive income can be a great way to supplement your regular income, and it can also be a good source of retirement income.
Potential for capital gains: If you sell your rental property for a profit, you may be eligible for a capital gains tax exclusion. According to Jason Kuennen, this means that you could potentially exclude a portion of the sale price from your taxable income. The amount of the exclusion depends on a number of factors, including how long you have owned the property and whether you have used it as your primary residence. For example, if you have owned the property for at least two years and have used it as your primary residence for at least two of the past five years, you may be able to exclude up to $250,000 of the sale price from your taxable income if you are single, or up to $500,000 if you are married filing jointly.
Losses: If you incur a loss on your rental property, you may be able to claim the loss as a deduction on your tax return. According to Jason Kuennen, for example, if your rental property generates more expenses than income, you may be able to claim the loss as a deduction. However, there are limits on the amount of loss you can claim, and the rules can be complex. It's a good idea to consult with a tax professional to understand how rental losses can affect your taxes.
There are many potential tax benefits to owning rental property, but it's important to keep in mind that there are also a number of tax rules and regulations that you must follow. Be sure to consult with a tax professional or the IRS
