Real Estate

Tax Benefits of Residential Rental Property

The federal government and some states offer tax breaks to both landlords and tenants of residential property. Some of these breaks take the form of tax deductions. Others take the form of tax credits. As a landlord, you can also benefit from lower tax rates if you sell rental property at a profit.

Landlords Are Entitled to Tax Deductions

A "tax deduction" is an amount that you subtract from your income, lowering the amount of income that can be taxed. As a landlord, you can deduct the interest you pay on a mortgage, for example, as long as the mortgage loan was used to buy the property.

Landlords can also deduct local property taxes, insurance premiums, repair costs, and mortgage points paid at closing. If your property is damaged by a natural cause, such as an earthquake, you can deduct the amount of the damage.

Improvements to Leased Property Have Tax Consequences

As a landlord, you can deduct the costs of repairs and depreciate the costs of improvements to your rental property. Something is considered a repair if it keeps your property in good working condition but doesn't add to its value. For example, fixing a leaky is a repair but adding a second bedroom is an improvement.

Tenants in Some States Are Eligible for Tax Credits

A tax credit, unlike a tax deduction, is subtracted directly from the amount of tax that you owe. Some states offer a "renter's credit." California and Minnesota, for example, allow you to claim a renter's credit if your total income is lower than a certain amount. In Maryland, the amount of the credit is based on how much rent you pay compared with your income.

Landlords Can Benefit From Lower Tax Rates

If you build rental residences on land you own, you may increase the value of that property. In addition, the value of the land itself may increase over the years. If you sell this real estate at a profit, the amount of your profit is taxed as "capital gains." Although the capital gains tax rate changes frequently, it is typically lower than income tax rates.

A Tax Lawyer Can Help

The law surrounding the tax benefits of residential rental property is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a tax lawyer.

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