A Quick Review of Tax Savings Tips for Property Managers, Investors, Homeowners and Landlords
As a new or current property manager or property investor, you’re undoubtedly wondering about how you can create the best tax situation for yourself.
You’re burdened by the thought of rising property taxes, rising contractor fees, property price capital gains issues, and other stuff you might not be able to pass onto your tenants. Income tax and property tax are yet more headaches you wish would disappear as part of your harried property management work.
To that very important end, we have a short guide on the key things you need to know, including some of the recent changes introduced by the new Tax Cuts and Jobs Act bill.
Tax Cuts and Jobs Act
New Revised Tax Exemptions from the Republican’s Tax Cuts and Jobs Act will make a difference in the tax owed by Homeowners, Landlords, and Real Estate Investors. And it will affect those who are renting and still considering buying a home. It creates some new tax doors for you and yet closes some others.
From flipping to buying a second home to buying multiple properties for rental income, paying less tax is vital to investor and small business success.
Keep your mind open and begin to examine how you can cut your taxes and leverage your property wealth better.
Exploring Tax Deductions: The Good, the Bad & the Ugly
If you’re new to the world of rental property investment, this short blog should help you recognize the taxes and tax deductions you’ll need to manage. Please note that this helpful overview is not meant to replace legal tax advice provided by a qualified tax accountant. It should help you think about and plan your tax strategy.
There was a lot of hype and misunderstanding about what was proposed last fall and what was actually passed in the new Trump tax bill. There’s some Good changes such as the standard deduction which was almost doubled. Other perhaps Bad changes for investors and homeowners however limit the amount of mortgage interest you can claim and how much state and local property tax (SALT) you can deduct.
As a property investor with significant wealth in play and at risk, you need a good tax strategy to keep your business solvent. Tax planning is critical to building your long term wealth.
And, if you’re a property manager, it’s wise to help your investors learn and avoid paying maximum taxes. It’s good for your future salary potential and it’s one more way you can add value to your role in property management.
And remember that paperwork and spreadsheets are not tax deductible, your rental property management software is! And your software will help you keep better control of tax documentation of all types. Take a good look at the full benefits of simple property management software and how it helps with tax preparation and other accounting tasks.
Please do share this post on Facebook and Linkedin — help your professional connections save money on their taxes!
Part Time or Full Time Pro?
If you’re a part time real estate person or investor, your losses are passive and only deductible up to $25,000 against your rentals’ income. You may need to incorporate and go Pro in order to access greater revenue and tax savings.
If you spend the majority of your time as property manager, or real estate investor, your rental losses are not passive. This means that your losses are fully deductible against all income, passive and non-passive. This is where it gets good.
A professional real estate person is one who spends half of their time, more than 750 hours working in their real estate properties. How you establish your business determines a lot about its potential revenue and perhaps whether you can access more investment funds and better mortgage rates. Something to consider.
The Tax Cuts and Jobs Act doubles the standard deduction from $6,350 in 2017 to $12,000 now (and for couples is $24,000 now from $12,700 last year)
Tax Changes for Homeowners Too
As a homeowner, the new tax changes may affect your tax situation.
The Tax Cuts and Jobs Act raises the standard deduction to $12,000 from $6,350 in 2017 ($24,000 from $12,700 for couples). This means homeowners no longer need to itemize mortgage interest and property tax bills that fall below these thresholds.
The new Tax Cuts and Jobs Act unfortunately lower the amount of deductible property taxes and other state and local taxes to a $10,000 ceiling. And further, it cuts back the potential mortgage interest deduction to a new limit of $750,000.
It’s now believed that only 14% of homeowners will use itemized tax returns now, down from 44% last year.
The Ugly might be that the new tax law will discourage those who rent, who have saved for it, from buying a home or a condo. And fewer buyers will buy second homes. This will likely cause a drop in demand for new and used housing, however the economy is strong so after a few months, buyers may return to the market to buy a property.
After establishing your overall business tax strategy, you’ll need to attend to the items or expenses you can claim, as this will indicate what price of property(s) you might be able to afford. Your numbers for next year’s tax return will look a lot different from 2017.
What are your Allowable Deductions or Writeoffs for 2017?
In short: they will include mortgage interest, property tax, repairs, maintenance, travel expenses, vehicle expenses, advertising, software subscriptions, internet service, cell phone, business use of auto, workspace in your home, home office renovations, heat, electricity, utilities.
Your home improvements may not be tax deductible, since they’re considered a capital gain, however repairs and maintenance are deductible.
It’s When you sell a property, that you need protection from capital gains expenses and from paying the depreciation recapture. To do that, you’ll use a 1031 exchange to carry depreciation forward to the next property. You must buy the like-kind property within 40 days, so you should have that new property already researched and ready to buy.
As part of the Section 1031 of the Internal Revenue Code, the 1031 Exchange is essentially a swap of the tax liability of one real estate investment asset for another.
To create a 1031 exchange, investment properties must meet these criteria:
- The value of the replacement property must be equal to or more than that of the property being sold.
- Properties in the transaction are exchanged for another type of asset, such as a real estate investment trust (REIT).
- The new property must be held for “productive purposes in business or trade.”
Pass Through Entities Advantages
Real estate investors stand to benefit from the changes made to pass-through entities (Partnerships, Sole Proprietorship, LLCs and S corporations). YOu’ll want to examine the corporate tax rate, obligations and consider the new low tax rate of 29.6% on qualified business income. Rentals and new real estate development investments may both qualify for the 20% deduction for pass-through entities.
Passive Income Tax Benefit
The self-employed / FICA Tax will save you from being taxed like an employee at the Federal 15.3% tax rate.
Tax Free Refinancing & Interest on Mortgages
You can take out a line of credit on your property of refinance the property and use that money to buy another property, or use that money to improve another property you own. However, you can only write off the interest and expenses paid on that property if there are home renovations and improvements.
The mortgage interest deduction was reduced from a limit of $1 million to $750,000.
Consider the term when you claim capital gains when selling properties.
Short term of one year is taxed at a higher rate. The longer term is a lower rate and you could be exempt from paying taxes on profits up to $500,000 on selling a property. If a property investor sees their capital losses exceed their capital gains, they are able to offset upwards of $3,000 of other income.
The New IRS Tax Brackets
|Tax Rate||For Individuals||For Married Couples|
|10%||Up to $9,525||Up to $19,050|
|12%||$9,526 to $38,700||$19,051 to $77,400|
|22%||38,701 to $82,500||$77,401 to $165,000|
|24%||$82,501 to $157,500||$165,001 to $315,000|
|32%||$157,501 to $200,000||$315,001 to $400,000|
|35%||$200,001 to $500,000||$400,001 to $600,000|
|37%||over $500,000||over $600,000|
|Data From Taxfoundation.org|
How to Handle Losses
Property managers and investors can claim losses from one rental property in order to offset taxable income generated by other rental properties. It’s possible to reduce your taxable income earned from other sources.
Building Depreciation That Can be Claimed
Depreciation can claimed on the building of course not the land. Residential property can be deducted over 27.5 year time frame and for commercial properties over 39 years.
House value / 27.5 = deduction each year
Modified Accelerated Cost Recovery System (MACRS).
Can you claim depreciation on improvements? For repairs and improvements, it may be better to itemize the cost for each item, then depreciate or deduct each cost separately.
Claiming Rental Income
Unless you are a fully qualified real estate professional, your rental business is classified as an active business according to the tax code.
The Tax law states that all rental activities are passive activities, even if the landlord is a material participant. Therefore, losses incurred from rentals can only be deducted from other passive income.
Generally, a passive activity is any rental activity OR any business in which the taxpayer does not materially participate. Nonpassive activities are businesses in which the taxpayer works on a regular, continuous, and substantial basis. In addition, passive income does not include salaries, portfolio, or investment income.
As a general rule, the passive activity loss rules are applied at the individual level. — From the IRS
Rental income is any income received for the use of tangible, either real or personal, property, However, if you rent the property out for 122 days of the year and occupied it for 31 days, then only 80% of any deductible expense can be claimed.
If you rent out your primary residence for 15 days or less over the year, then the income you earned will not be taxed.
Flipping the House you Live in
Flipping a house you live in offers many tax benefits and the capital gains is often very good too. And there’s ways to avoid the tax you must upon selling.
If you’re living in a house and flipping it, you’re considered a self-employed taxpayer. You can claim what are called office and capital expenditures and most of your business expenses and commissions paid to realtors and lawyers related to the property. You can claim office expenses this year, however you can’t claim capital expenditures until you sell the property.
Estate Transfer Taxes
The new tax bill raises the estate transfer tax exemption limit to $11.2 million per person ($22.4 million for a couple) which is double what it was previously.
Property Tax Deductions
If you’re hoping to improve property investment income, there’s plenty you can do. As a property investor you might also consider the weight of the taxes in the locations you could buy properties.
There are federal, state and local taxes that must be paid every year, and they may be significant in the state and city you’re considering. There is even more to consider than the typical property taxes due in each state as you’ll see in this graphic courtesy of Wallethub.
Managing Your Tax Burden
The above is just some ways you can lighten your tax burden. You can discuss your property investment tax strategy with your tax accountant and determine what legal and business entity status you should pursue for the years ahead.
We hope you’ll get every tax break you can and that of course, you’re able to manage your portfolio documentation and financial transactions well. Using a property management software package can make it easy to keep on top of the glut of paperwork. That in itself may help you get all your tax deductions and avoid an audit.
Take a test drive of the simple accounting features of ManageCasa. Our aim is to make property management a breeze for you in 2018.
See also: Rental Property Management Software | Tax Tips for Property Managers | Real Estate Portfolio Tips | Starting a Property Management Business | How to Use Property Software | Increase Investment Property ROI | Improve Property Cash Flow | Property Management Contractor Scams | ManageCasa Property Management Solution | Tenant Screening