Article summary
Learn about factors you need to consider regarding taxes, forms of ownership, appreciation, and depreciation in order to get the most out of your property investment.
Utilize a Trust and LLCs
It’s wise to protect your assets by gifting your home into an irrevocable living trust and by putting your rental property into an LLC.
Gifting your home to your family's trust is not a taxable event, nor is it a taxable event when the trust gives the principal (your home) to its beneficiaries (your descendants) upon your passing. Utilizing a trust prevents your family from having to pay estate tax on the property.
However, if you purchase a vacation home or separate rental property, consider forming an LLC and purchasing the property with the LLC (one per property). Then, gift your ownership interest in the LLC to the trust. There are several reasons why this makes good business sense, both from a tax perspective and from a liability perspective, and you can learn more here.
Claim Rental Property Earnings on Your Tax Return
If you choose to use an LLC to purchase rental property, set it up as an S-Corporation. In doing so, you may qualify for the Qualified Income Business deduction from the IRS. In addition, you’ll use the Schedule E form and Form 4562 to detail income, loss, and depreciation.
Keep Those Receipts
Unlike stocks, bonds, and other passive assets, rental properties have maintenance and other expenses that can be deducted from your stated earnings to reduce your tax liability. The IRS only wants to tax you on the amount you earn after expenses, so keep good records and read a complete description of the IRS policies here.
Understand Depreciation
Perhaps the greatest benefit your rental property can bring you is its ability to be fully depreciated over 27.5 years. This means that you can divide the cost of your property (minus the value of the land) by 27.5 years and deduct that amount each year from the property’s earnings. This is how some rental properties can even end up paying no taxes at all! Read more here, or check out the IRS publication on depreciation here.
Don't Forget to Appreciate What You Have
Your property is likely to appreciate in value while you are claiming a tax deduction for the depreciation of its useful life. This means that when you're ready to sell, you could make a profit on its increase in equity. If you want to secure gains, whether you’re facing rising or falling residential property values, consider Home Price Protection from REZITRADE. Home Price Protection limits your downside from negative swings in the market by safeguarding your principal.
Remember that everyone's real estate situation is unique, so it’s important to consult a tax professional when determining what strategies are best for you.
Takeaways
- Trusts and LLCs create tax and liability shelters for your properties.
- Operating expenses on your rental properties qualify for tax deductions.
- Rental income is typically taxed like the rest of your income.
- Depreciation of properties can greatly reduce your tax liability.
- Appreciation of rental properties is yet another potential upside to ownership.
