Are you a landlord and wondering what tax incentives you are entitled to?
Investment property owners are able to deduct all costs associated with ownership yet some are limited in taking the full depreciation deduction.
The rules state that if you are not deemed a Real Estate Professional, you are able to deduct up to $25,000 of depreciation depending on your income levels. For most married couples, this ‘special allowance’ is eliminated once their modified adjusted gross income exceeds $150,000.
What is depreciation?
Depreciation is the ability to deduct the cost of your investment property over the course of 27.5 years and should you own several rental properties this amount can be significant.
If you are deemed to be a Real Estate Professional, you are not limited to $25,000 nor does your income matter. Generally, rental activities are passive activities even if you materially participate in them. However, if you qualify as a Real Estate Professional, rental real estate activities in which you materially participate in are not considered passive activities.
To qualify as a Real Estate Professional, you will need to meet both of the following tests, per the IRS:
1. More than half of the personal services you performed in all trades or business during the year were performed in real property trades or businesses in which you materially participated, and
2. You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated
This is a huge tax planning opportunity for those of you who are a landlord and spend a considerable portion of your time handling your tenants and maintaining your properties – one that should not be overlooked!