Tax benefits can help you to cut down on your rental expenses by thousands of dollars each year.
How much do you know about the tax benefits that are available to you?
If you’ve been searching for ways to maximize your rental income, you’re in the right place.
This article will show you how by exploring the tax benefits related to your California real estate investment.
You may be wondering; what are my tax incentives in California? Keep on reading to learn more about the tax benefits you can use to maximize your rental income.
Common Real Estate Tax Benefits in California
It’s said that “a dollar saved, is a dollar earned.” And this concept greatly applies to California’s rental property taxes.
Where to start?
1. Tax Deductions
Tax deductions can be your biggest source of tax benefits.
That’s because the government allows you to deduct all expenses you incur to maintain, sustain, manage, and repair your property.
What are these expenses?
According to the IRS, rental properties have a productive lifespan of 27.5 years. That means that – to them – your property loses value each year.
They allow you to deduct a depreciation expense each year to cover your property’s exhaustion (wear and tear).
To calculate your depreciation expense, here’s the formula:
Depreciation expense = Actual value of the property divided by 27.5 years.
For example: If you own a $200,000 rental property, your depreciation expense would be:
Annual depreciation expense = $200,000 / 27.5 = $7,273
Under these conditions, you’ll be allowed to deduct $7,273 depreciation expense from your gross taxable rental income each year.
- Interest Payments
Interest payments can also be huge deductible expenses for you. This simply means that you can write-off your:
- Mortgage interest payments.
- Home improvement loan interests.
- And even credit card interest on products and services used in your rental property.
Note that this only covers the interest payments and not your monthly loan repayments.
- Maintenance and Repairs Expenses
Provided that they are necessary, reasonable, and ordinary, you can also write-off maintenance and repair expenses. These expenses include cleaning costs, repainting, plumbing, and electrical repairs, broken window replacements, and so on.
Basically, any maintenance and repair expense that maintains the value and state of your rental property counts as a deductible.
- Travel Expenses
Did you know that you are entitled to a tax deduction on all the travel expenses you incur for your rental activities?
You are allowed to deduct your expenses whenever you travel to your rental property to:
- Deal with tenant issues
- Deliver supplies
- Collect rent
- Purchase a spare part for a rental repair task
Fuel, vehicle repairs during your travel, airline tickets, hotel accommodation, and meals if you stay overnight also count as travel expenses.
You can deduct vehicle-related expenses as the actual expenses you incur (repairs, upkeep, and gasoline), or using the standard mileage rate as per the IRS.
You can check their website for more information.
However, you have to be very smart with how you deduct travel expenses. The IRS will need proof of these expenses.
Make sure you have sufficient and legitimate receipts/documents to back your travel expenses.
- Home Office Deductions
If you use a home office to manage the affairs of your rental property, all expenses you incur to maintain that office count as deductibles.
This write-off applies regardless of whether you own the office property or are just renting it from another landlord.
- Insurance Premiums, Utilities, and Employee Salaries
The government allows you to deduct premiums you pay for insurance on your rental property.
Fire, floods, theft, and landlord liability insurance all count as tax deductibles.
You can also deduct your property’s utility expenses and on-site employee salaries from your gross taxable rental income.
- Professional and Legal Services
All expenses you incur to hire attorneys, accountants, real estate investment advisors, and property managers are deductibles.
However, these services and professionals must be there for rental-related activities such as:
- Attorneys to help you with tenant eviction proceedings.
- Accountants to manage your property’s finances.
- Property management companies to look after your rental property and so on.
As you can see, there are so many tax deductions you can benefit from to lower your tax obligations.
2. 1031 Exchange
As per Section 1031 of the Internal Revenue Code, you can swap your rental property for another with little to no tax obligations.
The 1031 exchange allows property investors to pass on their capital gains from one property to another without having to worry about taxes.
You have to meet a few conditions in order to qualify for this tax benefit.
- Both properties – the new and the old one – must be considered “like-kind.”
- The new property’s value must be greater than - or equal to - the value of your old property.
- Neither of the properties should have been held for personal use.
- The new property must be used for productive business purposes only.
4. Long-term Capital Gains
How do you benefit from this tax-wise?
Unlike short-term capital gains (profits from the sale of properties owned for less than a year), long-term gains have lower tax obligations.
Think of it as a discount from the IRS.
The longer you hold your rental property, the lower they’ll charge you in taxes when you decide to sell.
There you have it.
From the tax benefits above, it’s quite easy to see how you can cut down your tax obligations.
In fact, if you employ smart tax strategies, you can end up saving thousands of dollars each year. Sounds amazing, right? Then you start applying these tips as soon as you can and keep track of all your expenses that can be deducted.