Posted by Abundant Wealth Planning LLC

Are Rental Properties Taxes A Headache?

Are Rental Properties Taxes A Headache?

Every investment opportunity is excellent for people who seek long-term and consistent returns, but real estate is in a class of its own. Real estate is a most profitable investment opportunity but is it worth the tax headache? The IRS and government will always have tax rules for sectors like the real estate industries that offer high yields and returns. But if you are keen on maximizing this sector, you must understand the tax aspect. 


In fact, before purchasing your first property, you must know the tax implications of owning such a property, so you are not unpleasantly surprised in the future. Buying a piece of rental property, for example, has a way of messing up your taxes because rental property taxes are quite more complex than the regular income tax. 


There are two kinds of taxes regarding rental income and implications that some property owners don’t know. The first type relates to how the IRS handles rental income generated from your property, while the second pertains to how the sale of the rental property goes. 


If you have a rental property and rent it to some people, you will need to know how the rental revenue is taxed. Rental income is taxed as regular revenue. If your income is at the 22% marginal tax group with $55,000 in rental income, you will have to pay $1,100 as tax. 


But there is more: the owners of rental properties can reduce their income tax weights in different ways. A rental property may show a lack of income and losses for tax reasons. To calculate rental income, you must first know what it means, and the IRS describes it as the payment one receives for the use of his property. The rental income includes rent payments you get from tenants. So if a tenant submits a $1,000 check for one month’s rent, you can call this rental income. 


Here is an illustration of how to calculate taxable rental income: 


If you purchased a duplex building in 2016s at $300,000, the land would be worth $75,000. The duplex’s units will be occupied and bring in $1,300 monthly as rental income, which means your yearly rent will be $31,200. From this calculation, you will be placed in the 22% tax bracket, and in 2020, you will have: 


  • $10,000 in mortgage interests. 

  • $2,000 worth of insurance.

  • $1,000 in tenant-paid utilities 

  • $3,120 in property management

  • $4,000 in real estate taxes

  • $500 for deductible expenditures. 


S0, you have a total of $20,620 (expense). Additionally, you will have $8,182 yearly depreciation subtraction based on the nature of your property and the value of the land. Your taxable income will then be:


Rental income - $31,200


Expenditures - $20,620


Depreciation - $8,182


Taxable income - $2,398


The tax bills on rental properties will never end so long the property remains standing with tenants. Even if the property has no tenants, the land will be taxed as well. It is always best to prepare for the taxes and the fact that you will always make these payments; this is how you can prepare to maximize your rental property. 


If you still have any questions regarding rental properties and taxes, please reach out to a tax professional who will help you navigate the system. Every taxable rental situation is different, so you will need the help of a professional to get it right.


To answer the question: yes, rental properties and taxes are indeed a headache, but every good thing that offers the promise of increased yields also gives a headache; what matters is knowing what causes the tax situation, avoiding getting into it, and keeping a clean record. 


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