Rental property: A gateway for tax savings?

Image Source: dailyfinance.com

The opportunity to get a deduction on income taxes is one of the most popular reasons why some people choose to invest in real estate. However, as many would later on find out, this particular benefit is not ensured with every purchase of investment real estate. An analysis of the property owner’s full tax situation is needed to determine if tax savings can indeed be obtained.

What should property owners be on the lookout for?

When filling up their IRS 1040 main tax form, rental property owners should take note of the calculations for their real estate rental property operations on the schedule E form, which will also flow to the 1040 form line 17.

Many taxpayers use deductions and losses to reduce their starting “gross income” to the lowest “taxable income” possible. On the Schedule E form, the property owner needs to list all the property’s income and also its expenses for the year. The expenses, which include costs of maintenance work, property taxes, mortgage interest, insurance, and the property’s depreciation, are subtracted from the property’s income.

Image Source: irs.com

The tax deductions stem from the resulting value of the property, if the expenses exceed the total income. The net value counts as a loss and the result is a reduction of the owner’s personal income. This affects the entire 1040 form because it can reduce their taxable income.

Caveat: There are also several limitations in place to prevent wealthy people from taking advantage of the tax saving measures available to rental property owners. Finding out which of these apply to their situation needs the input of a tax professional. It is therefore recommended for property owners to avoid expecting tax deductions simply because they’ve invested on real estate and consult a tax professional to determine if there are other options available to them.

Image Source: amerihopealliance.com

Applegate Property Management offers property management and leasing services to residential and commercial property owners in Minnesota and Wisconsin. For more articles about real estate, visit this Facebook page.