Good to know for when I file 2015.
What are the tax benefits of being a landlord?
With all the problems landlords get stuck with, from leaky faucets to late paying renters, you would think no one would want to own rental properties.
The tax code is quite favorable to real estate owners, however. Some of the tax breaks for landlords go a long way toward making all that trouble worthwhile.
If you are renting residential real estate, you can deduct up to $25,000 for expenses in excess of rent income ($12,500 if you are married filing separately and did not live with your spouse). You cannot take this deduction if you live with your spouse and you file separately. Your loss on residential rental real estate can reduce the amount of tax you pay on your other income, such as wages. That's a good deal.
Better yet, your loss on rental real estate can include depreciation on your rental property, even though depreciation doesn't cause money to leave your pocket right now. In other words, you can have a positive cash flow from your real estate investments, and no taxable income or a loss from your investments on your tax return, thanks to depreciation deductions.
Of course, when you eventually sell the real estate, the depreciation reduces your basis in your property, so the tax is really being deferred, not avoided forever. However, you're generally better off paying tax in a later year, when possible.
If you do have taxable net income from your real estate investments, one consolation is that you don't have to pay self-employment tax on it. That's better than the 15.3% you pay on self-employment income on top of federal and state income tax.
As a landlord, you can also take other deductions, including your travel to work on the property, repairs and maintenance. You can even pay family members, including your kids, to work on the property.
If you sell the property after owning it for more than one year, you pay tax on any gain at the favorable capital gain tax rates. For most people, that's 15%, instead of the 25% they pay on ordinary income. (You pay a higher rate on the amount of gain that is equal to all those depreciation deductions you took.)
Even those capital gains taxes can be put off, however, if you play it right when you sell. One way is to sell the property in an installment sale and take part of the gain in each year you receive payments. Another way is to do a Section 1031 exchange - basically a trade. By doing so, you put off paying tax on the gain until you sell the second property.
Tax benefits of being a landlord
Tax benefits of being a landlord
From Taxact: