From depreciation and repairs to mortgage interest and operating expenses, there are numerous strategies for reducing what you owe the IRS at tax time. In this article, you’ll discover some of the most powerful tax strategies for investment property owners in Birmingham, Alabama, and how you can get the most out of your returns this tax season.
Tax Time Benefits for Birmingham, Alabama Investment Property Owners
Tax time benefits are simply the set of incentives and deductions given to investment property owners that can help reduce their tax burden. Property management in Birmingham can be incredibly expensive, and tax time benefits can help reduce the cost of ownership. These benefits include:
Mortgage Interest
The most common deduction for investment property owners is mortgage interest. Owners of rental properties can deduct the amount paid toward their mortgage interest from their taxable income. This includes payments made to banks, credit unions, and other lenders on loans used to purchase or improve a rental property.
Property Taxes
Property taxes can be deducted in full as an itemized deduction on Schedule A when filing your federal income tax return. To take advantage of this deduction, you must have paid the taxes due within the current year or during the first three months of the following year.
Although there is no limit to how much you can deduct, it is important to note that these deductions cannot exceed your total taxable income for the year.
Repairs and Maintenance
As a property investor, you may have to repair things on your rental properties from time to time. You can deduct these costs of repairs and maintenance as an expense, provided that they are ordinary and necessary for the upkeep of the property.
The IRS considers “ordinary” expenses that are common and accepted in your trade or business. “Necessary” expenses are those which are helpful and appropriate for your business.
It’s also crucial to note that the timing of when to make repairs or improvements can affect tax benefits. You can deduct the cost of repairs and maintenance as an expense in the current year if they are done before tax time, but you cannot deduct any costs associated with improvements that happen after the end of your tax year.
Depreciation
One of the biggest deductions for investment property owners is depreciation. Owners are able to deduct a portion of the cost basis of the property each year, which helps offset rental income from their properties.
Cost segregation can be used to accelerate the depreciation of property and maximize tax benefits. This strategy is especially beneficial for owners who have recently purchased or remodeled their properties, as they can take advantage of accelerated tax deductions on those costs.
Advantages of a 1031 Exchange
A 1031 exchange allows investors to defer paying capital gains taxes on profits from the sale of an investment property by reinvesting those profits in another, “like-kind” investment property. This is a great way to save money and avoid paying taxes on the sale of a rental property.
By reinvesting proceeds from the sale of one property into another, investors can avoid hefty tax bills and benefit from more favorable long-term returns. This type of exchange is very attractive for those looking to upgrade their investments, diversify their portfolio or consolidate properties in order to reduce expenses.
Maximizing Tax Benefits through Working with a Qualified Tax Professional
Working with a qualified Birmingham property management company can help you take full advantage of available deductions and credits to minimize your overall tax burden. They’ll be able to do a deep dive into your unique situation and pinpoint exactly which benefits are applicable to your specific case. This could include deductions for depreciation, repairs and maintenance, mortgage interest payments, and property taxes.
With this, all you have to keep in mind is to diligently document your expenses throughout the year. Accurate recordkeeping is essential to maximize your deductions and credits. This will help you take full advantage of benefits come tax season.
Take Advantage of Tax Time Benefits and Reduce Your Investment Property Costs in Birmingham, AL
From deductions for home office expenses, depreciation of the property, and more — investment property owners have plenty of opportunities to save money come tax time.
At Decas Group Property Management, we understand that real estate investing is often complicated and overwhelming. That’s why we are dedicated to helping you maximize the benefits of owning an investment property and reduce the cost associated with it.
Contact us today! We are here to make sure that you get everything out of your investment that you can.
