Many of my sellers, including myself, who could not sell their home in the 2008 real estate market opted for renting their home as opposed to taking a big financial hit. Now that 2009 is here, the tax season is just around the corner. In addition to getting all the New Year's resolutions in order I though I would provide some ideas relating to tax advantages for renting our home. In this case we have gone from just being a homeowner & have turned this home into investment property. As always, my disclaimer is, that I believe this information to be accurate however, consult with your tax accountant as the tax law is always changing.
Taxes are a large part of our annual expenses. So we can't ignore the tax benefits that will accrue from our home rental. We can get a variety of deductions from the process of renting our home. Our active involvement in renting our home including setting rent, approval of tenants and determining capital improvements would help us qualify for various tax benefits.
We may also get an interest deduction equivalent to our mortgage loan interest. It means that the interest payable on the mortgage amount for the first year will allow us to offset the same amount of income that would otherwise be subject to income taxes. Property taxes that could be levied against our property would also be deducted from our taxable income. Such a deductions are not available to the usual homeowners.
The maintenance expenses that we incur on carrying out repair work for our property are also deductible when we calculate our tax liability. For instance, expenses incurred on repairing the rotten wood floors or similar ones, which are undertaken to keep the property in a good shape, can be deducted from our other taxable income. However, the expenses incurred to increase the market value or life of the real estate do not fall under this category of deduction. The benefit of such a deduction is meant only for investment property and not for the homeowners.
Maximum tax benefit results from depreciation, which is decline in the value of a property over a period of time. As a result of depreciation the accounting value of a real estate asset decreases, which is not the same as a decrease in the market value of that property. Thus the amount of decline in the accounting value of our property can offset an equal amount of exemption from our tax owed.
The depreciation is calculated over a period of 27 and a half years for a residential rental property and 39 years for a commercial investment property, which is the established economic lifetime. However, land is not depreciable from the point of view of tax benefits. Whenever a property changes hands the depreciation schedule starts all over again.
To a certain limit, our home which is now investment property, losses incurred during a year can be saved and taken forward to reduce the amount of passive income and the rental income in the future years. If we are unable to use it in any of these years we may use the same when you sell the home, although it has some restrictions. A tax advisor can be good assistance on these matters.
Turning our home into investment property provides substantial rebates in tax. It is only a matter of being aware with the rules and regulations related to it as well as maintaining good records. Have a Happy Tax Season.
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