Most likely, living in Miami, Florida, you have considered the possibility of buying property for the purpose of renting it out. Rental property can be a great source of income, but before you begin, give Mitch Heifler a call to figure out the best way to invest that will not cost you a fortune in taxes. If you already have rental property, he can help you organize your taxes this season for the maximum benefit available to you.
When considering the purchase of a rental property, make sure you consider all the factors that will take place after you purchase the property. For instance, your property taxes will rise considerably. In Florida, the Homestead Property Tax Exemption reduces your property and school taxes. This is given when the property is your primary residence. When you buy rental property, you are not entitled to the same reduction. This will affect what you charge your tenants.
Knowing what you can deduct on your taxes is extremely important for investors in rental property. Interest expenses will many times be your largest deduction. This includes mortgage interest payments on loans which are used to purchase a rental property, or used to improve the property. You can also deduct interest on credit cards which are used for rental purchases. Personal loan interest can also be deducted, if you use the amount of the loan to improve or purchase the property.
If you withdraw a loan with the intention of utilizing that loan to improve your property, but then keep it in the bank, you may not claim the loan interest on your deductions. The money in the bank, even borrowed money, is considered an investment. You may in some circumstances be able to deduct the interest you pay as investment interest, but always consult a professional like Mitch Heifler before claiming investment interest.
Interest can only be deducted if you legally owe the interest. If you receive a personal loan, with no interest, you cannot deduct any part of that loan as an interest deduction. You are also limited if you took out a second loan to pay for an initial loan. The interest is considered in that case to be non-deductible. Once you make payments on the new loan, however, you can deduct interest expense by applying the payment to interest, and then to the principal.
Expenses are a different deduction than interest. You cannot deduct expenses as interest that you have paid to obtain a mortgage on the rental property, including installing utility services, legal fees, mortgage commissions, surveys, title insurance, or back taxes paid for the seller in order to obtain the property. Instead, these expenses should be recorded, as they will add to your cost basis. If you decide to sell your property in the future, you will be charged a capital gain tax rate on your profit. The profit is determined by the cost basis (cost of the property at time of purchase + any improvement totals) subtracted from the sale price. By adding these items to your cost basis, you increase the amount, therefore decreasing the profit you are able to be taxed on when you sell the property.
Depreciation is another item you can claim with the IRS. Since your property is not fully deductible at cost right away, the government splits this cost over a period of time. This process is called depreciation. Depreciation calculates the worth of the property, and how long the IRS says you must depreciate it for, called the recovery period. You will deduct a percentage of the basis each year throughout the recovery period. This is usually a long period of time for rental properties. If you are able to claim your rental property as personal property, however, that can severely reduce the period of time, and allow you to claim the full depreciation faster. The guidelines for doing so are strict, so contact Mitch Heifler for assistance with determining your property status.
Repairs on rental property are fully deductible. Fixing the gutters, broken windows, leaks, or floors are all deductible repairs. You can also claim the expense of outside contractors who do the repairs for you, as a different deduction. While repairs are deductible, improvements apply toward the cost basis. Based on your goals, you may wish to repair property before taking on large improvements. For example, patching the roof would be considered a repair, and is fully deductible. Replacing the roof is an improvement, and can never be deducted from your taxes. It will, however, be added to your cost basis should you choose to sell in the future. Upgrades are also classified as improvements.
Usually, if you have a lot of repairs on your properties within the year, you’ll be running back and forth quite frequently. Luckily, you can claim your mileage for rental activity as well. This includes driving to your building for a tenant complaint. You can claim your annual expenses, like gasoline and repairs, or use the standard mileage rate. If you are using the standard mileage rate, you need to keep a log of your mileage, and you must use this method the first year you use your vehicle for business/rental purposes. Furthermore, if you are traveling overnight for rental reasons, such as out of state property with a complaint, you can deduct your airfare, hotel bills and meals.
Premiums paid for insurance on rental activity can also be deducted. This includes landlord liability insurance, and coverage for fire, theft, and flood. If your home is destroyed, you can also claim partial deduction on casualty losses.
If you’re renting property and live in Miami, Florida, contact Mitch Heifler to organize your deductions. Mitch Heifler will make sure you get the most out of your deductions and reduce your paid tax for the year. Click the link below to speak with him today.
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