The tax benefits of buying a rental property
A main reason people buy rental properties is for the returns on the investment. Many rental property owners may already know this. But perhaps few are aware of the various tax benefits they can get. Here are some of them.
Depreciation
One of the first tax benefits that property leases have with their owners is depreciation. Deduct the costs involved in buying and improving the property. Rather than taking tax deductions as a large chunk during the year the property is purchased, depreciation is spread over its useful life. You can start to depreciate the property once it is put up for a lease, not when someone starts to lease it. To better understand this specific tax benefit, you may need to consult with the IRS.
Deductions for dual use
Many rental properties can be used for dual-use deductions. With the professional help of accountants, legal tax deduction claims can be maximized. Tax benefits like this are commonly applicable to properties that are located in tourist or vacation locations. For example, if you own a rental property on the beach, you can cancel the deductions involved when you visit for regular inspections.
1031 Exchanges
Do you know that you can defer capital gains taxes using the precisely structured 1031 exchange? IRC section 1031 allows you to sell a property, reinvest the proceeds in a new property, and ultimately cancel capital gains taxes. It is stated that, “No gain or loss will be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged only for property of the same type that will be held for productive use in a trade or business or for investment “.
Property owners planning to use the 1031 Exchange should carefully learn what similar type means because the tax code does not have such a definition. Better yet, consult tax advisers or real estate agents to better understand the terminology.
If you are considering buying a rental property, think about the various tax benefits that may be on your side. Depreciation, dual use, and 1031 exchanges are three of them. Each of them has certain processes to follow to qualify. Consult a property tax advisor for legal advice.
For other real estate concerns, your local real estate agent can always expand his professional experience. It can also connect you with tax advisers within your network.