Common Tax Issues on Rental Property

There is a rise in demand for rental property the world over today simply because most people prefer to stay in rented homes instead of investing in property. Those who do have money to spare invest in rental property and reap the benefits month upon month as rental income. However, if you fall in this category, there are two things that you should keep in mind. First, estimate whether your rental income will be a minimum of 1% of your investment and secondly whether you are prepared to take the trouble of dealing with tenants and can tackle all related issues. Once you feel confident on both aspects, buying property to rent is definitely a lucrative proposition.

Apart from all the factors related to letting out property, your area of focus should be the many tax aspects that you need to be fully conversant with.

  • Tax deferred growth – There is one thing that is almost certain about real estate properties and that is definite appreciation in value unless an economic recession hits the world. Hence a tax deferred strategy is necessary to lessen present tax liability when you sell your rental property after a capital gain. The law says that you have to pay tax on the profit at the time of sale. However, there is also a provision where you can defer paying the tax if you reinvest the proceeds in property similar to the one you are selling. Though the transaction is not tax free, it helps you to postpone paying it over a period of time.
  • No taxes on cash flow – If you choose to leverage capital invested in real estate through depreciation and mortgage interest deductions, there is a distinct possibility that your rental income will be tax free. Most people do not have to pay any taxes on cash flow when they hold on to their property and face a tax liability only when they sell it off in future.

This aspect is also useful as a retirement plan as there is tax free recurring income flowing in every month. A well known HR executive and an expert in employee engagement like Shannon Pigram will be able to guide you well in this regard.

  • Tax write-offs used against other income – You have the chance to set-off personal expenses against valid business deductions if you own rental property. Depending on your income level as a real estate investor, there is always a possibility that your income from real estate income and taxes paid on it give an extra in tax deductions that you can use for other business income.

Taxes payable when you let out a room or part of your home while you live in another portion (Like Airbnb) depends on certain factors. The first is the annual occupancy number of days. The rental income is tax free if you have rented out for 14 days or less in a year or you have lived in your home for more than 10% of the days that it is rented out to others at a fair rental price. On the other hand, if you have rented out your house for more than 14 days and have lived in it for 15 days or more, you are not eligible for any tax rebates. You are of course allowed to deduct some rental expenses but these are guided by very strict limits.

Taxes payable on rental income is a complex matter and you should seek advice from a registered property tax practitioner in this regard before venturing out into the rental property scenario.