Property Management Blog

Tax Benefits of Rental Properties Palomar Property Services

There are many benefits to owning real estate but not everyone knows about the tax benefits.

You can deduct expenses like property taxes, insurance, mortgage interest, property management fees, and maintenance expenses. 

You can deduct depreciation which is the incremental loss of an asset’s value due to assumed wear and tear over time. 

When you own rental property as a sole proprietor, partnership, LLC, or S Corp which are known as pass-through entities, and receive money from tenants in rent, it's considered Qualified Business Income or QBI. You’re allowed to deduct up to 20% of QBI on your personal taxes.  

If you profit from the sale of an asset that you’ve held for a year or longer, you see a long-term capital gain. The tax rate on long-term capital gains tax rate is lower than the tax rate on income.  

The most common and well-known pass-through deduction is a ten 31 exchange. If the new property you buy is of equal or greater value than the one you sell, the program lets you swap them for tax purposes. That means the capital gains tax on the sale of the first property is deferred. You can use ten 31 exchanges indefinitely and only pay taxes when you cash out at the end.  

Typically, you need to pay both the employer and employee portion of the FICA tax which covers Social Security and Medicare if you're self-employed. However, the money you receive from your rental property isn’t classified as earned income which means you can avoid paying FICA tax.    

Most real estate investors think about income earned on the monthly rent or appreciation when they sell but don’t consider the numerous benefits and savings from taxes. 

Give us a call today to discuss your investment property and property management needs.  

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