If you run a business based on rental properties, then you need to read this article. We are going to share with you the best strategies on how to reduce income tax on rental property, the legal way.
From deducting your expenses to using borrowing smartly, we will share with you the working strategies that will help you to save money in taxes.
Reduce Income Tax on Rental Property by Taking Advantage of Deductions
As a property owner, you can take advantage of a large list of deductible expenses. Be it roofing expenses, a new floor, repairs for the bathroom, insulation, HVAC, etc. You can deduct both the materials and the cost of labor.
On top of that, you can also deduct expenses such as mileage, which is how much you spend on traveling from your home to your rental properties. If you actively manage your properties, then you can deduct plenty of money here.
You can also deduct the interest you pay on loans and mortgage, as well as the expenses at your home office for running this business. That is why you need to record all of your expenses religiously, and hence, having a qualified accountant will help you to save money, because this professional will take care of this for you.
Use Depreciation to Reduce Income Tax on Rental Property
Your property will depreciate over time, and hence, the IRS allows you to deduct a proportional rate every year based on its lifespan. As of now, the IRS has set the lifespan of a residential property at 27.5, which means that you can deduct 1/27.5 every year.
You can also claim depreciation on things like a new roof, a new HVAC system, repairing the floor, a new kitchen installation, etc. All of these investments will be subjected to depreciation, and hence, you can use them to your favor at the hour of reducing your taxes.
Borrowing Can Save Your Rental Property Business Plenty of Money
As we mentioned before, you can deduct the interest you pay on loans and mortgage from your taxes. On top of that, this will help you to increase your cash flow, which is an important ally for growing your business.
Let’s suppose you have to pay $5,000 USD to repair the bathrooms of your rental property. Instead of paying in cash, you could go ahead and get a loan for $5,000 USD – that way you keep the $5,000 USD in cash, you pay for the bathroom repairs and you can deduct the interest you pay from your income taxes.
Do You Qualify for an Exemption?
If you only have one rental property and you want to avoid paying income taxes, then you should apply for a tax exemption of a personal dwelling. Therefore, you need your rental property to qualify as a personal dwelling.
As of now, a personal dwelling is considered as any property where you, the owner, lives at least 14 days per year or 10% of the number of days you rent the property in a year.
For example, if you want to rent the property for 10 months per year, then you need to live in the property for at least one month plus one day for it to qualify as a personal dwelling.
However, for the tax exemption to work, you also need to keep the short-term rentals at less than 15 days; otherwise, you will have to pay taxes on income. It does not matter how much money you make out of renting your property for less than 15 days, you do not have to report to the IRS nor pay a cent on income taxes.
Reduce Your Income Tax on Rental Property Legally with Quilca CPA Group
If you want to save taxes on rental properties legally, then you will need a custom strategy for your case. Give us a call to (786) 310-5582 or write us to [email protected] to analyze your case and create the strategies that your rental business needs to start saving more money on income taxes.
