By Jason Epps, CFP®, CRPC®
If you have decided to take the plunge into rental real estate properties, then you probably know how great a resource real estate is as a wealth-building tool. While not an altogether passive form of income, if they are managed well, rentals can be fairly low-maintenance investments. Better yet, they can provide a very healthy rate of return on your investment, making real estate a fantastic option for diversifying your portfolio.
Unfortunately, some property owners are missing out on a key way of maximizing their rental property income through proper tax management. Let’s take a look at some of the tax advantages that can help keep you from leaving money on the table.
A Penny Saved
Deductions are a critical piece of the puzzle when it comes to not overpaying for taxes on your rental income. There are several unique deductions available that should not be overlooked.
- Loan interest: If you financed all or part of the purchase of the rental property, then you are able to claim the interest on the loan as a deduction. You aren’t able to claim the principal payments, but you can claim the origination fees from when you took the loan or refinanced.
- Property taxes: If you pay property taxes to your state or local government, you can deduct those taxes against the income from your rental. You should also be sure to look for any other landlord fees or taxes levied against your property and deduct those also.
- Maintenance: Regular maintenance or repairs of the property are a deductible expense, as are most improvements to the property.
- Insurance premiums: Carrying insurance to protect your investment is wise. If you have a loan on the property, it is also probably required. This makes it a necessary expense, and also a tax-deductible one.
By taking advantage of the deductibles, you can reduce your tax liability and ultimately increase your income.
Deducting Depreciation
One other special deduction that is allowed for rental real estate property is claiming depreciation. As time goes by, the value of any structures you have on the property may experience devaluation. This may be due to wear, certain features of the home becoming out of date, or property values generally falling in any given area.
Because of this, the tax code allows a property owner to claim this devaluation as a loss called depreciation. The depreciation must be claimed over time, and cannot exceed the total value of the property. For example, suppose you purchase a property where the value of the property (minus the land) is valued at $500,000. This value is called your cost basis. You can claim your depreciation out of the value of your cost-basis amount until the cost basis is $0.
The IRS allows for depreciation on residential rental property to extend over the course of 27.5 years, meaning that each year you can deduct 3.636% of the cost basis, or roughly $18,180 in our example. After claiming this deduction on your property over the course of about 28 years, your cost basis will be reduced to nothing, and you will no longer be able to claim depreciation.
While a great way to offset tax liability against your income from a rental, the rules for this deduction are fairly complicated. Make sure you have a tax professional assist you to ensure you follow the IRS guidelines correctly.
Talk To An Expert
Rental property can be a great avenue for additional income, with many tax advantages available to the savvy investor. But to make the most of it, you want an advisor who knows how to help you take full advantage of the opportunities real estate can provide.
At KFA Private Wealth Group, we have wealth management professionals with years of experience available to guide you through real estate management. If you are ready to feel confident that you are making the most of your real estate investment, email jepps@kfapwg.com or call 301-305-8875 to schedule an appointment today!
About Jason
Jason Epps is vice president and private wealth advisor at KFA Private Wealth Group, a registered independent advisory firm founded on the premise of providing conflict-free financial and investment advice. With over 15 years of experience, Jason possesses the unique knowledge and expertise necessary to provide his clients with the most applicable and beneficial financial guidance that helps them find confidence in their financial future. Jason is a CERTIFIED FINANCIAL PLANNER™ (CFP®) practitioner and a Chartered Retirement Planning Counselor℠ (CRPC®) and believes that a financial plan is only as strong as the advisor’s understanding of the core values and beliefs of each client. He serves a diverse range of clients, from young accumulators to pre-retirees and retirees, including business owners and professionals in a variety of fields. Jason is passionate about giving back to his community and volunteers with various organizations in the D.C. metro area. He also has coached youth travel and AAU basketball since 2009. When he’s not working, you can find Jason spending time with friends and family, traveling, trying out new restaurants, and cheering on local D.C. sports teams. To learn more about Jason, connect with him on LinkedIn.