There are some basic tax considerations when investing in property that you’ll want to discuss with your accountant. And you should always seek the counsel of an accountant when deciding on purchasing income producing property.
Here are a check-list of items to go over regarding the tax treatment of your investment property. Some of these issues involve whether you are planning on buying or selling a property in the current year. And some involve planning for future years, if you plan on holding the asset for the long-term.
Know that with investment property, all expenses attributed to the purchase, fixing up, maintenance and marketing for sale are fully deductible against any income on the property.
Like a home purchase, when you purchase investment property, all closing costs incurred during that purchase (for example, title insurance, attorney and recording fees) are not deductible. However, they will be added to the cost basis of the property when it comes time to sell it (which may be in the same tax year), thus reducing your eventual capital gain and concomitant tax as well.
Good record keeping is crucial
Be sure to keep careful records of all your improvements to the property. Unlike a home purchase, repair items to your investment property are deductible, since every thing you do to the property is considered an “improvement.” So bringing a plumber in for minor sink or dishwasher repairs (which would not qualify as deductible for a homeowner) would be deductible for your investment property.
Of course, more obvious improvements might include large-scale projects such as renovating a kitchen or baths, or adding a deck or an extension on the house. These are not considered deductible. Rather, these are considered capital improvements, and they will add up. They will help increase the cost basis of the property, which will help reduce any eventual profit when it’s time to sell.
Rental property expenses
Rental properties that are held for a long time can have many expenses deducted from rental income on a yearly basis, to further reduce any profit on the building. These include items such as the mortgage interest, taxes, insurance, water service, garbage service, maintenance and repairs, fix-up costs, advertising and marketing costs, landscaping service and depreciation.
Seller financing considerations
If you decide to act as a mini-Bank of England, and offer a private mortgage to a buyer when you go to sell your property, the IRS will want to know about your lending empire. All interest earned on the mortgage paper you hold must be reported to the IRS.
Other issues to discuss with your tax advisor
These include the transfer of property from one spouse to another in a divorce proceeding. (This could yield no tax liability for the transferring partner).
Also, if you’re doing your real estate investing as an unmarried couple, the IRS rules concerning the sale of property among unmarried couples should be brought up for those in this category. Again, it’s imperative to check with your accountant on these complicated issues.
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