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Rental Property Tax Breaks

Rental Property Tax Breaks

Rental property offers more benefits than just the income it provides and the hopeful retirement benefit from a pay-in-full mortgage in the future. One of those benefits is the tax breaks provided from operating a business which has both expenses incurred during its operation and depreciation over the years. As with any tax break, review the appropriate publications provided by the Internal Revenue Service and speak with a tax lawyer certified public accountant to minimize the chance of potential audit.

As with operating any business, the majority of the benefit will be realized by claiming deductions for expenses that accrue from maintaining the property. These business related tax deductions often relate to paying property taxes and mortgage interest in addition to claiming deductions for insurance, site maintenance and building and property repair. These tax deductions are claimed because money is spent in the operation of the business but the one benefit you don't need to spend money on is depreciation. Depreciation is a type of tax deduction which applies to property which decreases in value due to wear and tear over its lifespan.

Another type of tax break which is often experienced by many businesses is a loss of income. If the expenses of maintaining property exceeded the income generated from tenets then this loss can be deducted to lower adjusted gross income. The key to claiming the tax break is the property owner must be an active participant in the property management and day-to-day operations. It is still possible to use a property management company to collect payment and pay a Homeowners Association but the property owner must still actively participate in interviewing potential tenants, approving expenditures and negotiating contracts as they relate to the property.

To realize additional tax breaks for rental property requires investing in those programs which receive funding or subsidies from the state or federal government. Individuals who invest in long-term housing units for specific types of commercial buildings which exceed a certain age can often qualify for certain tax incentives. The reason why these types of properties receive government tax incentives is because it is in a municipalities best interest to combat blight and urban decay by incentivizing investors to purchase this types of property. It is common practice for state or local governments to offer significant tax breaks for a company to occupy an abandoned factory or warehouse in an old part of town to help with re-gentrification efforts. Tax credits can range anywhere from 10% to 90% of the cost involved of rehabilitating the property. Due to the amount of money involved, there are specific guidelines and requirements that property owners must follow the qualify for these tax breaks.

Tax breaks exist to encourage a specific type of behavior such as having children or hiring employees. Instead of having abandoned properties continue to decay and lead to decrease property values and increased crime, tax breaks are used to encourage investors and other potential property owners to assume a certain level of risk for real-world benefits now and in the future. The nice thing with rental property tax breaks is that it is above and beyond what is already expected from owning and renting a property. Ideally, income is generated every month from the difference between what the property is earning and what is owed. Owning rental property is not for everyone but i fthe thought of investing in stocks or bonds makes it hard for you to sleep at night then maybe rental property tax breaks are the last incentive you need to be a landlord.

Image by: Photo Dean