A rental property offers the opportunity to gain significant income over time that is particularly valuable.
One of the important responsibilities of a homeowner is knowing what expenses can and cannot be taken off the taxes through tax deductions. A full understanding of these deductions, as well as assistance from property tax consultants, will ensure you don’t pay any more tax than is necessary on your rental property.
The Capital Gains Tax (CGT) and Rental Properties
Capital gains tax is a tax paid when something you own gains value and you sell it for more than its original purchase price. When this tax is applied to a physical property, there are a variety of deductions you can take to reduce the tax paid.
The rules for capital gains taxes changed in 1985 for rental properties, and if you initially bought the property after 1985, you’ll need to be aware of the CGT. However, you may be eligible for a discount on your taxes if you’ve owned the property for more than 12 months.
Tax Deductions You Can’t Claim for Rental Properties
Saving every bill, receipt, and payment made in connection with your rental property is important for the purpose of reducing your taxes as much as possible, but there are some expenses you can’t claim on your taxes.
Those expenses include:
1. Expenses that come from the owner’s personal use of the property
2. Utility bills paid by the tenant instead of the owner
3. Costs associated with borrowing against the equity in the investment property
4. Costs related to the sale or purchase of an investment property
Although the costs related to the sale or purchase of the investment property can’t be taken off as rental property tax deductions, those costs can be helpful in reducing your capital gains taxes because the increase the “cost base” of the property. The cost base of the property is the purchase price you paid plus various costs that came along with the purchase like various legal expenses.
Tax Deductions You Can Claim for Rental Properties
Many expenses that come about when you own a rental property are tax deductible and making sure you take these expenses off your taxes is especially important at the beginning of your investment when you might be paying a mortgage and receiving limited income overall from the property.
Expenses you can claim include:
• Fees paid to a real estate management company
• Interest on the mortgage or investment loan
• Homeowner’s insurance or insurance associated with the property
• Advertising for gaining tenants for the property
• Travel expenses associated with maintaining the property
• Depreciation on certain house assets like air conditioners
• Utilities paid for the tenant
It’s very important to keep all receipts and documentation associated with these costs. Although you won’t need to send the government copies of your receipts when you file your taxes, it’s possible the IRS might have questions about your expenses and require that you produce your receipts.
Make Sure to Get These Important Tax Deductions
If you aren’t sure whether a particular expense is something your tax accountant or property tax advisor might find useful, it’s always best to keep the receipt, just in case. Some expenses will be obvious and easy to remember – like those mentioned above.
However, there are a few additional receipts and costs you’ll want to keep in your tax file until you hand over all your paperwork to your accountant or property tax consultant. Here they are:
Fees to professionals – If you hire an accountant specifically to assist with your rental property, you can take that expense off your taxes. Similarly, if you have to hire a lawyer to handle your property taxes, you can take that expense off, too. You can even take off professional fees paid to real estate investment advisors who provide information about your property.
Repairs to the property – Maintaining the property’s condition for your tenants requires time and money, and you can take costs like painting, repairs, and fixing various items off your taxes. However, it’s important to note that you can’t take improvements off your taxes (like a brand new roof). If you get the roof repaired, only then can you take that expense off your taxes.
Do you have questions about your rental property and tax time? Contact Hegwood Group for the information you need directly from expert property tax consultants.