Tax 101 for Real Estate Owners

We’re drawing near the end of tax season… Chances are you just frantically finished your filings, sent them off to the IRS on Tuesday, and are starting to prepare for the coming year. Tax can be a stressful time for everyone, regardless of who you are. Despite that, with a good accountant like Dave Burton all your tax worries can be addressed, such as filing for a tax extension, and your panic over the period can be reduced.

While it’s top of mind, we thought this would be a good opportunity to review some of the top tax tips and tricks for real estate owners. No matter if you’re closing on your first home or are a seasoned investor, it’s important to keep these deductions top of mind.

Mortgage Tax Deduction

The tax code allows homeowners to deduct their mortgage interest payments from their overall tax liability. For many Americans, this savings can be significant, especially in the early years of homeownership (since the amount of interest decreases as a mortgage is paid off).

  • Closing Costs: Homeowners have the ability to deduct the loan origination fees from their tax burden during the first year of ownership.
  • Property Tax: Real estate property taxes paid on an owner’s primary residence and a vacation home are fully deductible for income tax purposes.

Rental Property Deductions

If you own an income-producing rental property, or are involved in managing rental properties, you’re able to recover some of your costs through both ordinary tax write-offs and a process called depreciation…

  • Write-offs: Landlords can deduct expenses they incur in a given year to maintain their property. Examples include gardening, HOA fees, repairs, general maintenance, etc. All of these expenses are one-time, routine costs that don’t have a useful life beyond one year.
  • Depreciation: Any improvements or assets that have do have a lifespan greater than one year (the house itself, roof replacement, installation of a new kitchen) are subject to depreciation. Through the process of depreciation, owners allocate the cost of their asset across its entire useful life (the IRS allows 27.5 years for a residential property).

Example: ($300,000 property – $75,000 estimated land value) / 27.5 years = $8,182 / year

In the example above, the owner would then take the $8,182 depreciation expense and multiply it by their marginal tax rate to get their annual tax savings.

For additional information related to the tax implications of rental properties, please visit the IRS publication center: https://www.irs.gov/publications/p527

Capital Gains Exclusion

To further encourage homeownership, the IRS also allows single homeowners (meeting certain conditions) to exclude the first $250,000 of capital gain from the sale of their home from income taxes. When filing jointly with a spouse, this number increases to $500,000.

Example: A couple bought a house for $250,000 and then sold it for $500,000 ten years later… That $250,000 gain would not be taxed.

Further Investigation

At Spectrum Realty Group, we have legal and accounting experts on hand to help our clients navigate the complexities of real estate investing… Have more questions? Drop us a line: sales@spectrumrg.com or (305) 921-0972.

You can also check out some of the additional real estate tax resources we compiled below: