Ryan Barone, CEO of RentRedi, a property management software company, emphasizes the importance of planning for tax season throughout the year for landlords owning rental properties. Understanding whether the property is considered a business or investment by the IRS is crucial, as it can impact taxation and reporting. Barone, with an economics background, shares insights on potential tax advantages and concepts that landlords should be familiar with to make the most of available deductions and benefits.
One key aspect that landlords should consider is obtaining real estate professional status, which can provide tax advantages. To qualify, individuals must meet IRS requirements, including performing more than 750 hours of services related to real property trades or businesses and ensuring more than half of their personal services are performed in real property trades. Keeping detailed logs and records of property management activities is essential to verify the hours spent working on the property to meet these requirements.
Qualifying for real estate professional status can also impact passive activity losses, allowing landlords to deduct up to $25,000 of losses from passive rental real estate activities. Additionally, real estate professionals may deduct various expenses related to the maintenance, operation, and management of the rental property, such as mortgage interest, property taxes, insurance, and more. Barone recommends exploring home office deductions for those with dedicated workspaces in their homes.
Managing your own rental property can also help optimize your tax situation when selling the property. A 1031 exchange, as defined by the IRS, allows landlords to defer paying capital gains taxes on sold properties by reinvesting the proceeds in a similar qualifying property within 180 days. Understanding the rules and requirements of a 1031 exchange is essential for property owners, as the type of property being sold and acquired must meet certain criteria for the exchange to be valid.
Accelerated depreciation is another tax advantage that landlords can benefit from, allowing them to depreciate their property over time as it wears out. This can result in more depreciation being deducted in the earlier years of property ownership. However, meeting certain requirements is necessary for property owners to depreciate their rental property, and a cost segregation study can help identify components with shorter useful lifetimes for accelerated depreciation.
Given that tax laws are constantly changing and vary across states, consulting a licensed professional, such as an attorney, CPA, accountant, or tax professional, is crucial to ensure compliance with the most up-to-date regulations. Barone stresses that the information provided is not investment, tax, or financial advice, and individual circumstances should be consulted with a qualified professional. The insights shared aim to help landlords maximize tax benefits and deductions for their rental properties.
