Taxes are probably one of your most dreaded things to think about. But as with any investment, Uncle Sam is going to want to take a piece of the pie when your properties are raking in money. However, with real estate investing, there are a number of things to think about when it comes to taxes. (North Richland Hills Real Estate Tax Help: What to Know About Taxes.)
- Deductions – Real estate investors have the ability to deduct just about any expense they incur each month. This could be mortgage interest, property management fees, and even a lawn mower you provide your tenants if you require them to do lawn maintenance.
- Capital Gains – Once you choose to sell an investment property, you will realize a capital gain if the sale price is higher than the purchase price. The capital gains tax you pay depends on your income and the tax bracket you fall in. Below is a chart with the long-term capital gains tax rates.
|Taxable Income Range||Long Term Capital Gains Tax Rate|
|$0 – $78,750||0%|
|$78,751 – $488,850||15%|
|More than $488,851||20%|
- Depreciation – Depreciation is the loss of value for an asset because of wear and tear or age. The IRS says the depreciated life of real estate is 27.5 years. As an example, let’s assume you purchase a property that has a value of $200,000. To calculate the depreciation deduction you can claim on your taxes you would use the following formula.
$200,000 ÷ 27.5 = $7,272.72
In the calculation above, we determined that each year you’d be able to claim a tax deduction of $7,272.72 on your income tax return.
More Nitty Gritty
- Depreciation Recapture – Being able to deduct depreciation each year probably sounds pretty nice. Unfortunately, it’s not all good news. The IRS isn’t in the business of giving away free money. The downside of depreciation is that they will recapture this when you sell the property, plus a little extra. Let’s assume you owned the above $200,000 property for five years. You would have depreciated $36,363.60. Once you sell, the IRS is going to attempt to recapture that amount plus a 25% tax and any capital gains made on the sale. But what if you sell the property for a gain of less than $36,363.60? In that case, the IRS will only recapture the amount up to the gain realized on the sale.
- No Self-Employment Tax – Depending on how your real estate investing business is structured, you might be able to avoid paying self-employment tax on your earnings. This is because the rental income is not considered earned income in most situations.
The United States tax code is complicated and became even more so after the Tax Cuts and Jobs Act. We recommend you always consult your accountant before making any decisions that could affect your tax situation.
Call Scott A. Kunkel, CPA PC today in North Richland Hills at 817-498-1040 to have a chat about ways to save money on your taxes.
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Source: Quicken Loans