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Yahoo
26-05-2025
- Business
- Yahoo
5 tax deductions for rental property
If you're a landlord, your rental property not only brings you extra income but can allow you to write off tax deductions to lower your tax liability. From repairs and maintenance to mortgage interest and more, rental properties come with many expenses. In many cases, you can write off these costs on your tax return. Here are five tax deductions you can claim for your rental property. One of the key aspects of owning rental real estate is that you can deduct certain expenses on your income tax return. 'Typically any expense that you incur to run the property and generate income is considered deductible,' says Atiya Brown, a certified public accountant and owner of the Savvy Accountant in Mansfield, Texas. The IRS allows you to deduct ordinary and necessary expenses for your rental property. Those can include furnace repairs, lawn-mowing services, cleaning expenses between tenants and more. You can also deduct ongoing expenses like homeowners insurance and property taxes. See the IRS' tips for rental property deductions. However, don't confuse maintenance and upkeep with property improvements, which are handled a different way. You can't deduct the full cost of improvements right away, but you can recover the cost over time by using Form 4562 to report depreciation (more on this in the 'property depreciation' section below). 'Only a percentage of these expenses are deductible in the year they are incurred,' the IRS says. See the IRS instructions for Form 4562. Sole proprietors and owners of S corporations, partnerships and some trusts or estates might qualify to claim the qualified business income (QBI) deduction, also known as Section 199A. (See this IRS page for more information.) Learn more: Qualified business income deduction: What it is and how to claim it Passive activities, such as some rental activities, are usually not eligible for the QBI deduction. However, the IRS allows for a safe harbor under which a real estate enterprise is treated as a trade or business for the purpose of the QBI deduction. You can read more about how to qualify in this IRS document. Depending on how you run your rental property as a business, you might qualify for this deduction. Eligible taxpayers might be able to deduct up to 20 percent of their qualified business income, as well as 20 percent of qualified real estate investment trust dividends and qualified publicly traded partnership income. Keep in mind that the QBI deduction was introduced as part of the 2017 Tax Cuts and Jobs Act (TCJA). The QBI deduction and other provisions of the TCJA are due to expire on Dec. 31 unless Congress takes steps to extend them. The House of Representatives in May passed a proposed tax bill that would maintain the QBI and raise its value to 23 percent, from the current 20 percent. Learn more: Trump's tax plans: The 'big, beautiful' tax bill heads to the Senate Need an advisor? Need expert guidance when it comes to managing your investments? Bankrate's AdvisorMatch can connect you to a CFP® professional to help you achieve your financial goals. Depreciation allows owners to write off part of the loss in value of the property's structures due to wear and tear over time. In accounting, the process is typically referred to as capitalization. 'You can claim a percentage each year until the asset is sold or fully depreciated,' Brown says. Generally, you can start depreciating your rental property when it's available for rent, which means the property is suitable for occupancy, even if vacant. Typically, the improvements you make to your property can be treated as separate property for the purposes of depreciation. For example, a deck or bedroom addition can be depreciated separately from the rental property itself. The depreciation amount depends on a few different variables, including what type of item it is. For example, residential property is typically deducted over 27 ½ years, whereas appliances such as a stove or refrigerator are depreciated over five years. An important aspect of depreciation to keep in mind is something known as 'depreciation recapture.' If you sell your property for a gain, some of the gain may be taxed as income if you took depreciation deductions. You may also be able to find tax deductions related to running a business. For instance, if you have a home office, you might be able to deduct a certain amount related to using your home for business purposes. However, the home office must be regularly and exclusively used for business and be your principal place of business, according to the IRS. Learn more: The home office deduction: Who qualifies and how to calculate it Another area where you might find deductible expenses is if you have employees or contractors. If you employ a property manager or you contract people to fix up the property, for instance, wages paid may be deductible. (Check out this IRS page.) You may also be able to deduct any legal or other professional fees you incur. For instance, if you have to pay a legal fee as part of setting up an organizational partnership, that could qualify as a business expense. You might also be able to deduct fees paid to accountants, bookkeepers and tax preparers as part of the direct and necessary operation of the business. Learn more: 5 tips to find the best tax preparer for you Rental property tax deductions allow you to claim the cost of repairs, maintenance, taxes, insurance, depreciation and any other expenses associated with the property. But generally, if these deductible expenses exceed your rental income, you can only deduct up to $25,000 in losses in a given year, and only if you're below the income threshold. Here's the income limit on claiming these losses: If your modified adjusted gross income is $100,000 or less, you may be able to claim rental losses of up to $25,000. If your MAGI exceeds $150,000, you're not eligible to deduct rental losses. If a taxpayer incurs a loss over $25,000, the amount that exceeds the threshold is 'suspended until the property is sold or passive income is generated,' says Alton Bell, an enrolled agent and founder of Bell Tax Services in Chicago. In other words, you can carry the loss forward to deduct in future years. Bell recommends consulting a tax planner throughout the year to figure out income reduction strategies if you are subject to loss limitations. In addition, Bell recommends checking to see if you meet the IRS requirements for real estate professionals. If you do qualify as a real estate professional, you don't face the $25,000 limit on rental losses. To qualify, you must do more than half of your work in real estate-related activities, such as property management. As a second requirement, you need to work 750 hours or more in those activities every year and materially participate in them. Bell also says timing plays a vital role in lowering your tax bill. 'If you have a potential gain from a sale of another rental property, you can sell within the same year so that your losses can offset the gains,' he says. Current tax brackets What happens if you don't file taxes? Find and compare investment property mortgage rates
Yahoo
05-04-2025
- Business
- Yahoo
Haven't filed your taxes yet? Here are the pros and cons of filing a tax extension
If you're scrambling to file your taxes before the deadline, you're not alone. Each year, millions of Americans request a tax extension, which gives you an extra six months to file your return to the IRS. A valid tax extension moves your filing due date from April 15 to October 15. More than 20 million taxpayers filed for an extension in 2024, according to IRS estimates. In fact, it might even make sense to file an extension if you expect to file your return on time. 'You should consider filing an extension as part of your tax routine, especially if you have a complicated tax situation or might need more time waiting on tax forms, such as a Schedule K-1,' says Atiya Brown, a certified public accountant and owner of The Savvy Accountant in Mansfield, Texas. But if you might need your 2024 tax return for other reasons, those deadlines should be taken into account when deciding whether to file an extension. 'Be sure to consider external deadlines, such as financial aid applications or bank requirements, where a tax return may be needed. This could be a case where filing by April 15 is needed,' says April Walker, lead manager for tax practice and ethics with the American Institute of CPAs in Raleigh, N.C. Here are the pros and cons of filing a tax extension this tax season. Filing for a tax extension gives you more time to file your taxes. Instead of rushing to meet the April 15 tax deadline, taxpayers can take until October 15 to complete their tax returns. 'If information is missing or there are circumstances that are not conducive to gathering all of the data needed to file a complete and accurate return, filing an extension is often less expensive than rushing to file and then determining an amended return is needed later,' Walker says. Although tax extensions typically apply to federal tax returns, state requirements vary. Some states automatically grant additional time if a federal extension is filed timely, while others may require a separate state filing. Learn more: See your state's income tax and sales tax rates Keep in mind that filing a tax extension only gives you more time to file your tax return — it doesn't give you more time to pay your tax bill (more on this in the 'cons' section, below). Filing a tax extension can also extend the funding period for some retirement plans. In some cases, the additional time to fund retirement plans can help with cash flow planning, Walker says. If you own a business and want to fund a SEP IRA, the IRS allows you to do so by the extended due date of your business taxes. Business owners can contribute up to $69,000 to a SEP IRA in 2024 and $70,000 in 2025. Sole proprietors who report their income and expenses on Schedule C and file a valid tax extension will have until Oct. 15, 2025, to contribute to their SEP-IRA for the 2024 tax year. Note, however, that the extended due date varies depending on how the business files its tax return. Keep in mind that a tax extension does not extend the deadline for funding an individual retirement account (IRA). The deadline to contribute to a traditional or Roth IRA for the 2024 tax year is April 15, 2025. Learn more: Roth IRA rules you should know during tax season Filing an extension prevents the IRS from imposing the costly failure-to-file penalty, which is assessed if you fail to file your tax return by the deadline. The failure-to-file penalty is a hefty 5 percent of your unpaid taxes every month, up to a maximum penalty of 25 percent. While a tax extension does protect you from failure-to-file penalties, you'll still face failure-to-pay penalties and interest on any unpaid taxes until the balance is paid in full. The failure-to-pay penalty, however, is 0.5 percent of the unpaid balance every month — much lower than the failure-to-file penalty. Learn more: Can't pay your taxes? 4 ways to avoid major penalties While an extension gives you more time to file, it doesn't give you more time to pay. Any taxes owed must be paid by the original due date, generally April 15, to avoid potential late payment penalties and interest. 'If you owe, you should pay with your extension filing. Doing so will reduce or eliminate any interest and penalties you incur as those are calculated based on the original filing deadline date,' Brown says. If you're not sure what you owe, you have this option: Pay 100 percent of your 2023 tax bill — or 110 percent of your 2023 tax bill if your adjusted gross income was $150,000 or more ($75,000 or more if you filed using the married filing separately tax status). If you pay that amount by the April 15 deadline, then no matter what your 2024 tax bill ultimately ends up being, you won't owe underpayment penalties. Or, if you prefer, there's a different safe harbor: Pay 90 percent of your 2024 tax bill by April 15 — that's also a way to make sure you avoid underpayment penalties. One major drawback of filing a tax extension is that taxpayers expecting a refund must wait longer to receive it. Due to the recent IRS employee layoffs and the Trump administration's plan to slash even more IRS staff, some experts say that taxpayers who expect to receive a tax refund should file as soon as possible. That said, tax professionals haven't reported widespread processing delays. 'Despite the IRS staffing reductions, my clients haven't experienced unnecessary refund delays,' Brown says. 'However, I always encourage my clients to file their returns as quickly as possible if they want timely refunds.' Learn more: Tax refund schedule: How long it takes to get your tax refund While filing a valid tax extension provides more time to submit your tax return, it can also cause you to procrastinate even more. The extra time may cause some taxpayers to delay gathering their tax documents, and to push their tax returns further down the 'to-do' list. But if you file a tax extension, it's a good idea to start gathering your tax documents sooner rather than later and think about the best way to file — whether using tax software, a tax preparer or one of these five ways to file your taxes for free — to meet your new tax deadline. Failing to file by the extended deadline may result in additional penalties. Need an advisor? Need expert guidance when it comes to managing your money? Bankrate's AdvisorMatch can connect you to a CFP® professional to help you achieve your financial goals. Learn more: A checklist of tax documents you'll need to file your tax return Filing a tax extension is easy and free. You can file an extension online or by mail. Either way, you want to use Form 4868. You can file Form 4868 in a few different ways: For free, using IRS Free File online. Even if your income makes you ineligible to use Free File to file your tax return, you can still use Free File to file an extension for free. Through a tax professional, such as a certified public accountant or enrolled agent. By snail mail. The IRS considers the extension valid as long as the form is postmarked by the due date, April 15, 2025. It's wise to send your Form 4868 by certified mail to have proof of submission.
