Understanding Tax Credits Available to Real Estate Owners
Real estate ownership is an expensive endeavor. From mortgage payments to travel and supplies to repairs, there’s plenty to account for. The good news is that there are benefits to this substantial investment come tax time. If you know where to look, there are numerous deductions that can help recoup expenditures. Everything from a home office to depreciation can work in your favor.
Know Your Private Property Deductions
As a homeowner you can deduct property taxes on your federal tax return each year. Property taxes are charged by the state, county, and city within which the home resides. In most regions, the state oversees these amounts. However, some localized districts also apply assessments to properties. This is an amount charged to home owners for public improvements in their area. It’s incurred when an endeavor is deemed underfunded with tax money alone.
Assessments aren’t deductible, but property taxes are. You can claim them on your federal tax return for the year they were paid. If 2016 property tax was paid in 2015, it goes against the 2015 filing. This deduction does need to be itemized on your return. Additionally, mortgage interest payments may be itemized for a further deduction. Always keep clear records of these payments for easy filing. Also, note average property taxes and assessments when house hunting in a particular area. Begin with a basic budget calculator, and add these factors. In some areas, this makes the difference between an affordable home and one that’s out of reach.
Understanding Rental Property Ownership
As the owner of a rental property, there are a number of expenses you can deduct. Similar to private homeownership, mortgage interest can be claimed every year. Daily operating expenses can also be itemized and filed. This is especially helpful for those with a home office. Any equipment and supplies needed to keep the business running can be included. Fax machines, printers, paper, and staples are all examples. Some services are also deductible, such as phone and internet access.
Business travel, including mileage and meals, is also eligible for deduction. Remember to hold onto receipts; these expenses can add up to hefty deductions, but only if you retain proof of the transactions. This is one of the first things the IRS goes after during audits.
Some larger expenses involved in owning a rental property are deductible as well. Property insurance is a big one. Advertising, maintenance, and utilities can be itemized and filed as well, although you may have to pay all of the management experiences upfront. With a detailed record and some extra time on your taxes next year, you can recoup a sizable portion of it in deductions.
Keep in mind that the word “maintenance” is very specific. The IRS defines maintenance as anything that keeps a property in good working order without adding value. Fixing leaks, replacing windows, or repairing doors are examples. When a change is made to the property that influences its value—such as adding a fence or replacing the roof—it can’t be deducted. The government considers these expenses to be covered by depreciation deductions.
How Depreciation Can Work for You
Depreciation is a deduction applied to things that are expected to break down over time. A home qualifies as one of these objects. The government has determined that the lifespan of a residential building is approximately 27.5 years. Rather than claiming the entirety of a home’s cost in one year, it’s therefore spread out across this calculated lifetime. As an example, if you paid $300,000 for a home, this would break down to $10,909 annually for 27.5 years. This means that you claim a deduction of nearly $11,000 on your tax return each time.
Unfortunately, this deduction can’t be applied to a primary residence. It’s restricted to rental property owner’s returns. When it’s applicable though, it comes in handy. Getting what boils down to an installment plan helps balance out expenses each year. It’s especially beneficial when improvements are made to the home. Though you’re still paying out of pocket for these upgrades, depreciation deductions will help recover some of it.
Navigating Tax Season
Taxes are often hard to navigate for an individual. Adding a home into the mix further complicates things. If you’re a new homeowner, it may be worth consulting a professional for the first year. This will ensure every credit and deduction is accounted for. Having a professional, trustworthy accountant guide you through these processes as you expand will be worth the cost. It may mean spending a dime to save a dollar, so don’t work too hard to do it alone.