Owning real estate provides several tax incentives. Although the payment of taxes is inevitable, there are things that a landlord can do to save money on taxes.
Overview: The Many Types of Taxes
There are a hand full of different types of taxes that a landlord will have to pay. Property tax, income tax, and sales tax are the most common types of taxes that affect most every landlord. Saving money on taxes is possible for each type of tax. All a landlord has to do is understand the tax system and plan accordingly.
Saving Money on Property Tax
Property taxes are based on the value of your parcel of real estate. If you own property that is located in an area that has experienced a decline in property values, chances are you are paying too much for your property tax. Look at public records to see how much homes in your areas have sold.
Look at your prior year's tax assessment and see how much the taxing authority says your home is worth. If homes in your area are selling for significantly less than your tax assessment, ask the tax collector to reduce the value of your property. This can save you hundreds of dollars annually.
Save Money on Income Tax
The federal tax code is set up to give owners of real estate several tax incentives to invest in property. Most rental real estate will operate as a tax loss. Unfortunately, passive activity loss rules stipulate that a landlord can only deduct $25,000 per year off from rental real estate activity to offset ordinary income.
There is a loophole.
Real estate professionals can deduct 100% of rental real estate losses. A real estate professional for tax purposes must have over half his or her business activities coming from real estate activities. They also must spend 750 hours per more each year on real estate activities.
If you or your spouse can qualify as a real estate professional, you can enjoy significant tax benefits.
Save Money on Sales Tax
Saving money on sales tax is as simple as being efficient in purchasing decisions and doing simple repairs on your own. In some states, sales tax is levied on services as well as goods. Doing your own repair and maintenance not only saves you money through not having to pay someone else, it also saves you money because you won't have to pay sales tax on any repairs.