There are a number of tax advantages that can boost your profit potential when you own investment property. Although these advantages by themselves aren’t reason enough to invest in such a property, understanding these tax advantages ensures that you’ll be able to maximize your cash flow and profits while owning it. If you are planning to invest your surplus savings into real estate, it helps to know the basics. As with any other type of business investment, many of the costs associated with the property are often tax deductible including the following:
7 Key Tax Advantages of Owning an Investment Property in California
- Capital gains tax can be deferred – as an investor, you can defer paying capital gains tax on your rental property as well as the tax on depreciation recapture with a Section 1031 tax-deferred exchange.
- Depreciation deduction – the depreciation expenses on an investment property are also tax deductible. As a real estate investor, the IRS allows you to depreciate a rental property over 27.5 years to compensate for wear and tear costs.
- Mortgage interest – mortgage interest paid on financing an investment property is tax deductible. Furthermore, the interest paid on a credit card used to purchase appliances or fixtures for the property and any interest paid to an LLC that loans your money are considered tax deductible expenses.
- No FICA taxes – unlike taxpayers who are self-employed, the income generated by an investment property isn’t classified by the IRS as earned income. Consequently, the income earned from an investment property isn’t subject to FICA taxes.
- Operating expenses – including advertising costs, homeowner and landlord liability insurance, landscaping, leasing commissions, pest control, professional service fees (e.g. an accountant or real estate attorney), property management fees, property taxes, maintenance and repairs, supplies, and utility costs.
- Owner expenses – despite paying a management company to oversee the investment property, there are other expenses that are tax deductible such as continuing education, having a home office, and travel.
- You could qualify for a “pass-through” deduction – if you qualify for this deduction, you can deduct as much as 20% of your net business income when filing your taxes. To qualify, you must have a “pass-through” business meaning an LLC (limited liability company), partnership, S corporation, or sole proprietorship.
Contact Your Mortgage Specialist in Oakhurst CA
It’s easiest to think about owning a rental property in much the same way as owning a business because essentially it is. The one added advantage to owning an investment or rental property is the fact that you can sell it for a profit in the future. For additional information about owning an investment property, contact Granite West Funding at (559) 540-2275 today. Our business representatives are available to schedule an appointment to discuss your requirements and walk you through the process.