Tax Implications

Buying an investment property can be a great way to create extra income, boost your net worth and plan for retirement. But investment properties also carry different tax implications than regular residential real estate properties. If you’re thinking about buying a rental property for investment purposes, make sure you understand the tax consequences.

Capital Gains on Investment Properties

The IRS grants certain capital gains exemptions on primary residences, but not on investment properties. Persons who purchase investment property should understand the capital gains implications of the property they’re considering, and be prepared for those costs. Keep good tax records beginning with the day the property is purchased.

Closing Cost Implications

All closing costs associated with purchasing an investment property are added to the base price of the property for the purpose of determining the base price of the investment. Subsequently, the home is subject to depreciation for the next 27.5 years. You can’t depreciate the cost of the land, though; you have to separate the building from the land. The property assessment can be a good basis for determining the cost of the land versus the cost of improvements.

Capital Improvements may be Depreciated

Some capital improvements, such as a new roof or a new furnace, can be depreciated. Property owners may have multiple depreciations for various improvements, and these depreciations may occur over different lengths of time.

Many Costs of Rental Property are Deductible

Many of the costs of owning rental property are tax-deductible. Things like interest and taxes, utilities, repairs and maintenance cost are typically tax-deductible. Owners may deduct property management fees, the cost of ads or realtors to find tenants and other associated property costs. In some cases, deductible expenses may exceed the income generated by the property, which can have additional tax implications.

Keep Accurate Records!

The most important element of owning an investment property is to keep accurate records for tax purposes! Accurate records can help you maximize your deductions, reduce your capital gains taxes as much as possible and maintain the highest possible level of income from your investment. Additionally, those records are vital in the event of an audit!

 

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