** We are not tax experts. This is for informational purposes. PLEASE consult your tax professional.
Tax season is coming around the corner for 2022. Warner Robins homeowners, are you ready?
There are tax tricks you need to know if you are a homeowner or have rental properties. Let’s look at the tax benefits you should be getting ready for you end of the year filing. The whole point of these tax tricks is to help keep your AGR (adjusted gross income) below the threshold of the next tax bracket. The lower your tax bracket, the less you pay.
Make sure to study the tax laws that pertain to your situation. “Knowing the rules helps you win the game.”
Tax Tricks for the Homeowner
Homeowners, unfortunately, do not have a whole lot of tax benefits to use as the owner occupant over that of an investment property, but the tax laws in your favor are pretty substantial.
Interest deductions
Interest on a mortgage or HLOC (Home equity line of credit) can, many times, be a tax deduction. This will be found on your 1098 tax form, sent out by the lenders at the end of the year (before January 31, usually).
Tax trick 121
When you are ready to sell your house, there is a tax benefit there too. A homeowner can sell their primary residence and the proceeds can be tax exempt for the first $250,000 for a single tax payer or $500,000 for couples filing jointly. This is called a section 121 exemption. The main requirement is that this must be your primary residence for 2 out of the last 5 years. If the house was your primary home year 1 and 5, then a rental the rest of the time, that qualifies.
Add interest and “go long” trick
Another tax trick is selling your primary home with owner financing. Not only do you get the section 121 exemption, but the interest earned on the mortgage paid to the seller is “passive income”. Interest is taxed at a lower rate.
Many tax tricks for investment properties
- Repairs and expenses paid during the operations of a trade or business are tax deductible. Owning and/or managing rental properties is a “trade or business”. Broken windows, clogged toilets, replacing carpets are all deductible expenses.
- In some cases, tenants will trade repairs and upgrades to a rental unit for a reduction of rent. These services can be deducted, but it also claimed as income. Make sure this type of arrangement is charged at fair market value. You cannot work out a deal with your tenant to fix a light switch for three months rent, then deduct that ludicrous “income” on your tax return.
Get receipts for everything that is bought. Document, Document, Document!!
Tax Tricks for the Investor
Depreciation of an investment property
Did you know for the next 27.5 years after a house becomes an investment property, the improvements of that property can be depreciated? All improvements get old and loose value over time. Tax law allows the owner to deduct a portion of the lost value on each year’s taxes. Isn’t that nice?
Also, major purchases and repairs for the property can be depreciated as well. How long an item can be depreciated depends on the item. For example, A/C units and full roof replacements fall into a 5-year class.
Tax Section 1031 Exchange
While tax code section 121 is for owner occupants, the equivalent tax code section for investment properties that can be used to sell an investment property tax free is a 1031 exchange. This allows an investors to sell an investment property and reinvest the proceeds in another property within 120 days without paying taxes.
In a tax section 1031, the proceeds of the sale of an investment property are held by an accommodator. The investor has 45 days to identify a new property to buy and 120 days to execute the transaction. The accommodator sends the funds to the closing with the tax documents included. The documents are later filed with your tax return. The good part is that there are no taxes paid on the sale of the property, BUT, the tax basis (initial investment base amount) from the previous property transfers to the new property. If the new property is ever sold without executing another 1031 exchange, there will be even more equity that could be taxed.
Other Common Investment Property Tax Deductions
- The portion of your mortgage that is directed towards interest is 100% tax-deductible. Your mortgage lender will provide you a form 1098 in January stating this total.
- Travel to and from the property to make improvements, show the property, or collect rent are considered work expenses, and deductible (although mileage of your car must be at least 51% or more for business purposes).
- Certain deductible expenses that investment property owners take advantage of include property taxes, insurance, tax return preparation costs, lawn & garden care, losses resulting from theft or “acts of god” (floods, earthquakes, and other disasters), legal and professional services.
- Renting your primary residence for 14 days or less per year can be untaxable income.
- Your home office, if used to run your real estate investment business, can help generate tax deductions as well as long as the home office meets the minimum requirements (consult your tax advisor)
By taking advantage of all applicable tax deductions, investment property owners can increase their revenue and reduce their tax liability, opening the possibility to purchase additional properties. There may be other ways to decrease your tax liability. Talk to your financial advisor or certified public accountant, as they typically keep abreast of new tax deductions that Hawkinsville, Warner Robins, Perry investment property owners can claim.