What are the rules for tax deductions for investment property owners? How much tax do you have to pay if you sell your investment property?
“The only thing we can be sure of is death and taxes.” Yes, we all have to pay taxes, that's just a fact of life. But for owners of property, there are some deductions and ways you can pay less taxes each year.
One of the best things about investing in real estate, besides the way you can leverage other people's money to make money, is the tax benefits and deductions you're able to make when you own property.
As a property owner you can deduct a certain amount of depreciation on the property, have the ability to not pay capital gains taxes if you take advantage of a 1031 exchange, deduct your mortgage interest, and much more.
Here's a quick run down of some of the tax deductions you can make as an investment property or general property owner:
- mortgage loan interest
- home equity loan interest
- points on your loan
- capital improvements - any interest from a property improvement loan
- home repair loan interest when selling the property- painting or new floors for example
- property taxes
- selling costs - advertising of the property, inspections, and realtor's commission
There are a few ways you can avoid paying taxes all together, or at least on the gains you've made with the appreciation of the property. Here are the two main ways:
- one time capital gain exclusion if you've lived in the home as your principal residence 2 out of the past five years (entitled to $250,00 if you are single or $500,000 if you're married)
- 1031 exchange - sell property and purchase another one right away
Another way you can benefit from owning property is if you are a 'real estate professional'. I know a lot of people who get their real estate license just so they can qualify for these tax deductions. But if you work at least 750 hours per year working on your real estate related business, you can qualify as a ‘real estate professional’. Then you’re able to deduct 100% of your rental property losses for the year. Yes, not something you want but you might have some rental losses when transitioning from one tenant to another.
When you’re buying a new property, taxes will often go up since the value has gone up. Again, find the true value of the property so you are not over paying on two ends, for the property and then in taxes. More reason to negotiate and get the property analyzed on all levels— the appraisal, rent roll, foundation, structure, lease lengths, compare similar properties, and so on.
Property Tax - To calculate the property tax, the authority will multiply the assessed value of the property by the mill rate and then divide by 1,000. An example, a property with an assessed value of U.S. $ 50,000 located in a municipality with a mill rate of 20 mills would have a property tax bill of U.S. $ 1,000.00 per year. Source
The millage rate is determined by the community you live in and the revenue they need to run the community - maintain roads, schools, parks, police and fire services, and so on.
What's the true value, you say, well that's what someone is willing to pay for the property? But a close figure can be gauged based on the prices for property that's sold recently in the area. Read more on analyzing property.
Find the property taxes fees online, double check these numbers with what the seller gives you. Double check all the numbers the seller gives you.