If you are a new investor, you will quickly learn that buying investment properties adds an extra layer of complexity when the time comes to file taxes. The IRS taxes all capital gains but has different approaches for long-term and short-term capital gains. Long-term capital gains are the returns earned from a property that was held for more than one year and sold for more than its purchase price. The taxes are determined by a unique tax bracket that is lower than the ordinary tax rates that apply to income. A capital gain rate of 15% applies if your taxable income is $78,750 or more but less than $434,550 for single filers; $488,850 for married filing jointly or qualifying widow(er); $461,700 for head of household, or $244,425 for married filing separately.
In contrast, short-term capital gains are taxed as though they are ordinary income. Because income tax rates are higher than those of long-term gains, it can be a good idea to hold on to a property for a year prior to selling if your transaction gains cause your income to jump into a higher tax bracket. While it is possible to turn higher profits by cashing in and reinvesting, the tax policy in place incentivizes individuals to hold their properties for a year or longer.
Regarding rental property income, your earnings are taxed as ordinary income. However, there are an array of allowable expense deductions that will lower your tax bill. These include:
- maintenance expenses
- mortgage interest
- insurance costs
- advertising costs for the property
- payments to property manager
- HOA or condo fees
- property taxes
- services you pay for, such as utilities
- legal and other professional fees related to owning the property
It is worth underscoring the positive impact that depreciation deduction can have on your taxable rental income, which can often bring the property’s income down to zero for tax purposes. This is in fact one of the best advantages of investing in rental properties.
Do you want to know how else you can benefit from real estate investing? Contact the RLG team today to schedule some time to discuss how RLG’s vast experience in the sector can help guide you to success