There are many reasons that investors are putting their money into rental property. From ongoing income to tax benefits, we will look at them all, as well as one of the best ways your rental property can deduct your tax burden by getting a tax segregation study done on your rental property.
Ongoing Income From Rental Property
The number one reason investors choose to put their money into a rental property is that they are looking for significant annual yields. It has never been a better time to own rental property. “Renting statistics indicate that younger households rent longer and at greater rates as homeownership becomes a less attainable goal; the average asking rent among apartment listings nationwide is $2,016 monthly…. 42.9 million or 34.5% of U.S. households rent their homes.”1
Real Estate Tax Benefits For Rental Property
The Internal Revenue Code is friendly to investment property owners. This gives investors more reason to buy rental property. These tax benefits include tax-deductible expenses such as:
- Property management and leasing fees
- Maintenance and repairs
- Property taxes and mortgage interest
- Owner deductions such as travel expenses and continuing education
- Capital gains tax deferral
- Avoiding FICA tax
- Depreciation to reduce taxable net income
- Home office deduction
Good Record Keeping Is Essential
While owning rental property can be very beneficial, in terms of tax benefits, it is crucial that you keep good records to back up your claims. Good records help investors to:
- Monitor the financial performance of your rental property
- Prepare financial statements
- Identify the sources of income and expenses
- Track deductible expenses
- Prepare your tax returns
Then, if your tax return is selected for an audit, you will be able to provide evidence such as receipts, canceled bills, proof of payment, and other documentary support for expenses. If you are unable to provide evidence to support your tax deductions, you could be subject to additional taxes, penalties, and interest.
Consider A Cost Segregation Study For Your Rental Property
Cost Segregation is an IRS approved tax strategy that allows real estate owners to accelerate depreciation deductions to increase cash flow, and reduce the federal and state income taxes they pay on their rental income.
This begins with a cost segregation study. A cost segregation study breaks down and reclassifies certain interior and exterior components of a building, which would typically be depreciated over 39 or 27.5 years for commercial and residential properties, respectivly, to personal property or land improvements. These can be depreciated over 5, 7, or 15 years.
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1 Souza, Elizabeth. “Renting Statistics : FACTS & Trends in Rental Market.” IPropertyManagement.com, 14 July 2022, ipropertymanagement.com/research/renting-statistics.