Types of Taxes on Rental Properties
Rental properties are a big business in the U. S. According to the Census Bureau, there are about 20 million rental properties, with individual investors owning over 71 percent of them. While rental properties can produce some attractive income. They can also complicate your tax filing. Plus, taxes can make a big difference between generating a profit and losing money on a property.
Why Do People Buy Rental Properties?
People invest in rental properties for many reasons including receiving a high return on the funds invested, diversifying their investment portfolio, protecting invested assets through rising property values, and gaining the tax benefits of property ownership.
Taxes on Rental Properties
There are two primary aspects of taxes on rental properties. The first is taxes on rental income. The second is taxes on the sale of a property.
Rental income is a payment received for the use or occupation of a property. That includes regular rent payments, and it also includes advance payments like a first and last month’s rent. Any security deposit that is returned to the renter does not count as income except for funds retained for damages. Lease cancelation payments count as income. Services received instead of rent and tenant-paid owner expenses also count as income.
Rental income can be reduced, and the tax bill lowered, by deducting many expenses that are allowable by law. These expenses include maintenance, property management costs, utilities, pest control, property advertising, and legal fees.
Also, rental property depreciation allows a property owner to deduct the costs of buying and improving a rental property, thus lowering tax payments.
When a property is sold after owning it for a year, any profits on the sale are taxed at the lower long-term capital gains tax rate, instead of at the higher ordinary income tax rate based on one’s tax bracket.
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