Have you heard about using rental property to reduce taxes? It is indeed possible, and that is why we have created this tutorial, to show you how you can do it too. This is especially useful if you are a high earner, because it can help you to save an important amount of money.
Therefore, we invite you to keep reading this article. For any question, you can always call us at (786) 310-5582 and we will be happy to assist you.
Why Is Using Rental Property to Reduce Taxes Effective?
Rental property brings you two excellent benefits: you can take advantage of non-passive losses and make use of depreciation. However, it is only effective when your involvement in the rental property management is classified as non-passive, because passive losses come along with strict restrictions on how much you can save in terms of taxes.
Therefore, we also have to talk about meeting the tests for material participation by the IRS. Here is what you need to know
The Link Between Using Rental Property to Reduce Taxes and the IRS Material Participation Tests
Even though the IRS has 7 tests for material participation, you only have to meet one of them in order to classify your participation as non-passive, allowing you to take full advantage of the tax benefits of rental property.
Some of the tests include participating for more than 500 hours in the business and participation during any 5 of the preceding 10 taxable years.
About the Length of the Stays
If your average stay is over 7 days, then the IRS might determine that your participation is no longer non-passive, and hence, you will lose all the tax benefits. Therefore, we recommend you to manage this carefully, by trying to keep the average at less than 7 days.
How to Start Using Rental Property to Reduce Taxes – Working Strategies
Now that you know why using rental property to reduce taxes is effective, it is time to check the strategies you can implement.
Take Advantage of Non-Passive Losses and Make Use of Depreciation
If your participation has been classified as non-passive, then you can start claiming non-passive losses to reduce your taxes. They are basically all the losses from your investment in a rental property, which your participation is non-passive.
If you want to take full advantage of depreciation, then you need to get a cost segregation study. This will allow you to split your rental property into individual components that can be depreciated over shorter timeframes. This way you can show significant losses that will allow you to reduce your taxes.
Should You Hire an Accountant for Using Rental Property to Reduce Taxes?
Yes, even though it seems easy at a first glance, using rental property to reduce taxes requires a qualified accountant’s guidance. Otherwise, it is easy to commit expensive mistakes that will lead to penalties. And this is especially true if you are a high earner, because it can have a devastating effect on your finances.
Investing in an experienced accountant’s services is going to bring you an excellent ROI because you will be able to reduce your taxes by using rental property, the legal way. Therefore, if you want to take full advantage of these strategies, consider working with an accountant that is experienced in real estate.
Reduce Your Taxes Now with our Help
Rental property can help you to reduce your taxes, but you need an accountant to create a working and legal strategy for your case. If you are ready to get started, then give us a call at (786) 310-5582 or email us at [email protected] and we will be happy to help you.
