Capital gains/investment property

[Andreea12]

If I purchase an investment (rental) property, are there any tax deductions I'm eligible for OR any taxes owed?

Also, what if I hire a property management company? Thanks!

[conniem123]

Hi Andreea12

It's great to understand the tax responsibilities of owning a rental property prior to purchasing the property.

A rental property would be reported on your tax return, Schedule E.  The rents received and the rental expenses determine if you have a rental profit or loss.   There is not a tax deduction, but your rental expenses reduce your rental income.

Deductible expenses include, but aren't limited to:

• Cleaning and cleaning supplies
• Maintenance and related supplies
• Repairs
• Utilities
• Insurance
• Travel to and from the property
• Management fees
• Legal and professional fees
• Commissions
• Taxes and tax return preparation
• Lease cancelation costs
• Advertising
• Real estate taxes
• Mortgage interest
• Depreciation

If you have a profit on the rental property, that profit increases your income for that tax year.  If you have a loss on the rental property, that may not necessarily decrease your income for that tax year, as a rental property is considered passive activity and there are limits to the amount of the passive activity loss you can take on your tax return.  

 These rules are quite complex. In general, the passive activity rules limit your ability to offset other types of income with net passive losses.

But the good news is there is an exception: If you actively participate in a rental real estate activity, you can deduct up to $25,000 of your rental loss even though it’s passive. To actively participate means that you:

• own at least 10% of the property, and
• make major management decisions, such as approving new tenants, setting rental terms, approving improvements and so forth. (No, you don't have to mow the lawn or answer middle-of-the-night phone calls from tenants about a backed-up toilet.)

But this exception phases out as your income rises.

• If you have modified Adjusted Gross Income over $100,000, the $25,000 rental real estate exception decreases by $0.50 for every dollar over $100,000.
• The exception is completely phased out when your modified adjusted gross income reaches $150,000.

Here are a couple great resources,

https://turbotax.intuit.com/tax-tips/rental-property/real-estate-tax-and-rental-property/L3e09vT71

https://ttlc.intuit.com/turbotax-support/en-us/help-article/tax-credits-deductions/kinds-rental-prop...

I hope you find this helpful!

Connie

[Andreea12]

Thanks. Is there anything else I should know if the rental investment property is out of state?

[conniem123]

If the rental property is not in your resident state, you may be required to file a nonresident state tax return for the state where the rental property is located.  Each state has their own filing requirements based on income levels.

Hope this is helpful!

Connie

[Tax Hero Niki]

The responses already here in this thread are super thorough in covering the tax deductions.

And, you want to know if hiring a property management company has any impact on the expenses you can deduct? So long as you own the properties, you are entitled to the deductions as you are the one paying for them.