Owning a rental property in Burlington, NC, is a good long-term investment. However, when tax season arrives, the rental income you’ve earned may be subject to a high tax bill. But there are several effective tax strategies available that can help you reduce your rental income tax burden and maximize your rental income.
Partnering with an expert property management company ensures that you're maximizing the potential of your investment property while staying informed about the tax implications and strategies available to landlords like you.
In this blog, we’ll explore six key strategies to help you minimize your rental income tax.
Maximize Deductible Expenses
As a rental property owner, you can deduct expenses associated with operating and maintaining your property.
This includes:
Mortgage interest
Property tax
Insurance premiums
Maintenance costs
Professional fees
These rental expenses are often referred to as ordinary and necessary expenses, which the Internal Revenue Service allows you to deduct.
By keeping detailed records of all your expenses paid, you can ensure you’re claiming every deductible rental expense allowed. This can reduce your taxable income and your tax rate at the end of the year.
Expenses such as advance rent and those that the tenant pays for utilities or repairs can also provide valuable tax benefits when properly accounted for. These deductions can significantly reduce your taxable income, lowering the amount you owe for the tax year.
Depreciate Your Rental Property
One of the biggest tax advantages of owning rental real estate is depreciation. The IRS allows you to deduct the cost of the property, excluding land over 27.5 years old. That means you get to deduct a portion of the property's fair market value every year, even if it’s appreciating in the market.
Depreciation is a non-cash expense, which means it reduces your taxable income without reducing your cash flow. This strategy lowers your tax liability and can result in rental income.
Working with a tax professional ensures that your taxes are calculated correctly to maximize your benefits and minimize the net investment income tax.
Take Advantage of the “Pass-Through” Deduction
If you own your rental property through a pass-through entity like an LLC, you might qualify for the Qualified Business Income Deduction. This deduction allows you to deduct up to 20% of your net rental income, depending on your total income and a few other factors.
This is a new benefit introduced by the Tax Cuts and Jobs Act, and not all landlords qualify. Consult with a tax advisor to determine if you meet the requirements.
Consider Security Deposits
Security deposit is important in how you report income. If the deposit is not used for repairs or cleaning, it’s usually refundable to the tenant, and you don’t have to pay taxes on it.
However, if the deposit is used for repairs, you can deduct expenses related to the maintenance, which could reduce your rental income and lower your taxable income.
The tax return should also include any personal expenses not related to your rental property. This distinction helps separate ordinary expenses from taxable income derived from other sources. It ensures that your tax rate reflects only your rental activities and does not include unrelated financial matters.
Plan for Capital Gains Tax
You might face capital gains tax on any appreciation in the property’s value when you sell your property. However, you can reduce these taxes by taking advantage of strategies like a 1031 exchange, which allows you to maximize the proceeds from the sale of one investment property into the purchase of another, delaying the capital gains taxes until you sell the new property.
If you don’t plan to use a 1031 exchange, understanding your capital gains tax obligations and how they interact with your adjusted gross income can help you avoid surprises, ensuring you will not be overwhelmed by a large tax bill.
Hire a Professional Property Manager
Hiring a professional property manager is a smart strategy when it comes to managing taxes. Their fees are often 100% tax-deductible, and they can help you avoid costly mistakes while maximizing your rental property tax deductions. With their expertise, you can streamline your operations and focus on what matters most.
An experienced property manager ensures you're fully compliant with tax laws and assists you in implementing important tax strategies that can benefit you. They’ll help track rental income and expenses, manage rent payments, and ensure you're taking full advantage of available tax deductions. They are also experts with local taxes, including property tax and any specific regulations in your area, ensuring you stay compliant with local tax codes while maximizing your rental income.
Let HNN Atlanta Handle Your Property
Handling taxes on your rental property doesn’t have to be overwhelming. At HNN Atlanta, we offer full-service property management solutions to property owners like you.
From expert financial reporting to professional maintenance and tenant screening, we help you maximize profits while minimizing stress. We’ll also offer help with reporting rental income, ensuring you're claiming all eligible deductible rental expenses, and managing your operating expenses efficiently.
Contact us today for a free consultation and see how we can help you grow your rental income while reducing your tax liability
