Tax Benefits Of Renting Property
As we already discussed, owning a home is an excellent way to lay down roots in a community, but it is not necessarily the best choice for every person or situation. One option that many people choose instead is to rent a house or apartment from a landlord.
There are several benefits to this lifestyle choice, but one of the biggest is tax savings. Homeowners enjoy property taxes annually, while landlords only get paid when they sell their rental property.
Furthermore, renters do not have to pay income tax on their rents, whereas owners may face additional penalties if his or her taxable income exceeds certain limits.
Taxes can quickly add up, which is why being aware of all of your options is important. Fortunately, there are ways to reduce your tax burden as a renter even more! Read on to learn more about the different types of tax deductions you can use as a homeowner.
Capital Gains tax
Another way to save money by investing in real estate is through capital gains taxes. This article will go into more detail about this, but briefly, when you sell an investment property, you have two options for how to report it depending on what situation you are in.
If you live in the Wilmington NC area where you invested in the property, then you are considered non-residential. In these cases, people often times use the ‘site value’ method when calculating your capital gain. The site value refers to the price that the seller paid for the land and building, not including any mortgages or other fees.
By using the site value instead of the market value, there is no special treatment of the house aside from having to pay lower income taxes due to being classified as business equipment. This also means that you cannot claim the mortgage interest deduction while renting, however, you can claim rental deductions if you itemize expenses.
Mortgage interest tax
As mentioned before, one important way to reduce your taxes is by paying off as much debt as you can. This includes mortgages! If you have an investment property that produces passive income, you may be able to deduct the mortgage interest from your personal returns in addition to your rental return.
You can only claim this if you are in the habit of renting your property and investing the difference between your rent and mortgage repayments goes towards improving the asset or buying more properties.
This would mean that you get to deduct both the interest paid while owning the house and the interest spent developing your portfolio.
Claiming this deduction comes down to whether or not you consider yourself to be liable for the loan. If you don’t feel responsible for it then you aren’t eligible to claim it. Check out our article here about how to prove ownership of a business so that you qualify.
One of the biggest benefits to owning a home is that you get to deduct your property taxes from your income. Let’s look at an example: If the value of your house is $100,000 and its taxable value is $50,000, then you would pay $2,500 in total property taxes each year.
You can claim up to $8,000 per year in deductions for these fees when filing your personal expenses. This not only helps you save money in income tax payments, but it also gives you a more favorable net income calculation.
So what if someone offered you a way to earn even more by investing in a portfolio of rental properties? You could potentially reduce your overall tax burden substantially through the investment strategies used to run your rentals.
And since this article focuses on how to invest in real estate as a beginner, we will talk about one of the most important types of real estate: residential or so-called “owner occupied” properties. These are typically houses or condos that people live in.
But before getting too excited, there are some things you should be aware of with respect to this topic.
Cost of rent
One important thing to consider when deciding whether or not to own property is how expensive owning a house can be! While it may seem like a good idea at first, the cost of mortgage, tax deductions, and maintenance can add up very quickly.
If you are in your 20s, buying a home is still a great option as long as you plan on staying there for at least five years. But if you’re in your 30s or 40s, waiting that length of time could make purchasing a home no longer affordable.
And even if you don't want to buy a house right now, keeping an eye out for a rental property can reward you with financial benefits.
So before you decide not to invest, think about the costs of renting versus owning. And if you do choose to purchase a home, look into ways to save money by living close to work, avoiding large transportation expenses, and saving on monthly rentals fees.
I've gathered some helpful information here for you to consider. Hopefully one or two will speak to you and help you determine if investing in real estate is worth it for you today. Call Wilmington Realty Property Management Wilmington