Ryan Barone, CEO of RentRedi, emphasizes the importance of planning for tax season throughout the year if you own rental property. Understanding whether your rental property is considered a business or an investment by the IRS is crucial, as it can impact your taxation and reporting. Barone, with an economics background, encourages landlords to familiarize themselves with potential tax advantages and concepts to make the most of available deductions.
Real estate professional status, as defined by the IRS, is important for landlords looking to qualify for tax advantages. To be considered a real estate professional, landlords must meet certain requirements, including performing more than 750 hours of property management services each tax year. Keeping track of these service hours, using tools like property management apps, can help landlords qualify for this status and remove limitations on claiming passive activity losses.
Qualifying for real estate professional status can provide tax advantages, including the ability to deduct up to $25,000 of loss from rental activities from nonpassive income. Additionally, real estate professionals may deduct expenses related to maintenance, operation, and management of rental properties. Home office deductions may also be available for professionals with dedicated office space in their homes. Understanding these deductions can help landlords optimize their tax situation.
Managing rental property independently can also benefit landlords when deciding to sell a property. Section 1031 of the U.S. Internal Revenue Code allows for capital gains tax deferrals if proceeds from a sale are reinvested in a qualifying similar property within 180 days. Knowing the rules of a 1031 exchange and the types of properties that qualify is essential for landlords who manage their own rental property.
Accelerated depreciation is another tax advantage available to property owners, allowing for more depreciation in the earlier years of property ownership. Understanding the requirements for depreciation, as outlined by the IRS, and performing a cost segregation study can help landlords maximize their depreciation deductions. It is important to stay informed about evolving tax laws and consult with professionals to ensure compliance.
Overall, planning for tax season throughout the year, familiarizing yourself with potential tax advantages, qualifying for real estate professional status, and understanding deductions and deferrals available to landlords can help optimize your tax situation as a rental property owner. Consulting with attorneys, CPAs, accountants, or tax professionals is recommended to ensure compliance with the most up-to-date tax laws.