Investing in real estate would look very good on your portfolio. But just like any other asset, you may have to pay tax for the same. As rental income, the money that you earn from a property that you rent is taxable as well. It is true that millions of landlords are not yet aware of the tax benefits they can enjoy with their property. But the fact is that they enjoy more benefits than any other investment. As an added advantage, a number of tax benefits are offered for people who own homes.
Interest
The single biggest tax deductible for landlords would be interest. The interest expenses on rental properties are tax deductible. There would be deduction for mortgage interest payments as well. According to the studies conducted by The Congressional Joint Committee on Taxation (JCT), the estimate is that about 35 million homeowners had a savings of more than $1,850 in income tax in 2006. This deduction is mostly limited to the interest paid to purchase or rehabilitate a home. It is also possible for the homeowners to deduct the interest paid for the home equity debt, about $100,000.
Depreciation
You can claim depreciation on your property because the actual cost of a house will never be fully deductible.
Repairs
If it is a rental property, then you would have to do timely repairs and that is tax deductible. Fixing the gutter, repainting, fixing leaks, replacing broken windows and similar things are all subject to tax deduction.
Returns from buying a home for the homeowner
Buying a home is truly a sensible investment. After finishing with all the mortgage payments, you get to live in your home without any rent. The return that you get from homeownership is termed imputed rent, meaning you get tax exclusion. On the other hand the landlord receives rent, which is considered as rent. The homeowner is both a renter and a landlord, but the tax code sees the homeowner as a renter and does not accept his dual role of being a landlord.
Paying the capital gains tax
If you are selling any property, you are required to pay capital gains tax on the profits earned. But it is possible for the homeowners to get an exemption of $250,000 as capital gains tax, provided they fulfill certain criteria. To get this exemption, the home should have been their primary residence in at least 2 out of 5 years. Additionally, you should not have sought capital gains tax for the past two years. According to the report by JCT, the savings for homeowners on this account was more than $24 billion in income tax.
Independent contractors that you hire to conduct repairs for the property
You are likely to get tax deduction for hiring contractors and employees to get the repair work done for your property. The wages that you pay them can be deducted when you file income tax.
Going green
If your home has proper insulation, energy efficient doors and windows, high efficiency air conditioner and heaters, you can enjoy tax credits. You can enjoy additional tax benefits if you have solar energy insulations, provided it is not on your rental property, but on your primary residence.
One last note:
The people in the high tax brackets actually get more deductions and exclusions when compared to those in the low tax brackets. It could be due to three reasons:
a) Homeowners in the high tax brackets pay higher marginal taxes, so for them the deductions would be more
b) They typically pay more money as property tax and mortgage interest
c) The homeowners itemize deductions on tax returns