Ryan Barone, co-founder and CEO of RentRedi, a property management software company, emphasizes the importance of planning for tax season throughout the year for landlords to maximize tax benefits and deductions. Understanding whether the rental property is considered a business or an investment by the IRS is crucial as it impacts taxation. Barone, with an economics background, shares potential tax advantages and concepts for landlords to familiarize themselves with.
Real estate professional status is a designation that can provide tax advantages for landlords, according to the IRS. To qualify as a real estate professional, individuals must meet specific requirements, such as performing more than 750 hours of property management services per tax year. Keeping detailed logs of activities and hours spent on property management can help verify eligibility for this designation. Using property management apps with accounting features may assist in tracking hours spent on property servicing.
Qualifying for real estate professional status can remove limitations on claiming passive activity losses, allowing landlords to deduct up to $25,000 of loss from passive rental real estate activities from nonpassive income. Additionally, real estate professionals may be able to deduct various expenses related to rental property maintenance, such as mortgage interest, property taxes, maintenance, repairs, and depreciation, among others. This designation also opens up opportunities for home office deductions for those with dedicated office space in their homes.
Managing your own rental property can also optimize tax situations when selling, as a 1031 exchange allows deferring capital gains taxes on sold properties by reinvesting in similar, or “like-kind,” properties within 180 days. To qualify for a 1031 exchange, specific requirements must be met, including holding properties for investment or business purposes. Understanding the rules of a 1031 exchange and the types of qualifying properties is essential for landlords looking to defer capital gains taxes.
Accelerated depreciation allows property owners to deduct more depreciation in the earlier years of property ownership, while straight-line depreciation deducts the same amount every year. Requirements must be met for a rental property to be eligible for depreciation, and conducting a cost segregation study can help identify components of the property with a shorter useful lifetime. Tax laws are constantly evolving and vary from state to state, so landlords should consult with attorneys, CPAs, accountants, or qualified tax professionals to ensure compliance with current regulations.
The information provided is not investment, tax, or financial advice, and consultation with a licensed professional is recommended for individual situations. Forbes Business Council, a leading growth and networking organization for business owners and leaders, can provide additional resources and opportunities for business growth. Ryan Barone’s expertise in property management software and economics positions him as a valuable resource for landlords navigating tax season and maximizing tax benefits.
