Why Tax Benefits Make Investing in Philadelphia Rental Properties Worthwhile
One of the most significant benefits of investing in Philadelphia Rental Properties is the substantial tax rewards. The following are some of the tax benefits but remember that tax laws are highly dynamic, and you can exploit them to save more. Consulting an experienced Philadelphia Property Management Company, and a savvy Philadelphia Accountant will help you make the best choice.
Long-Term Capital Gains & Rental Property Investing
When you make a profit on a property sale, the IRS taxes the transaction. From 2018 onward, the IRS will apply your income tax rate if you hold on to the property for three years or less. For high net worth individuals, this rate can be too high. However, the much lower Long-Term Capital Gains tax rates apply to the profits of investors who hold onto their rental properties, for more than three years.
Deductions on Property Management Service and Travel Expenses
Most of the property management company expenses such as office supplies and mortgage interest are deductible. If your home is your office, you may be eligible to deduct internet fees, cell phone costs, mortgage interest among others. Ask your accountant if your home office qualifies for deductions.
You can also enjoy the standard mileage deduction. The standard mileage rate for 2018 is 54.5 cents per mile for business travel, as per the IRS. When you visit your rental properties, use this rate to calculate your business travel deductions. Don’t forget Philadelphia parking costs are also deductible. Meals and other associated costs to the trip may also be deductible.
Depreciation deduction allows you to deduct a portion of your rental property for a year. The depreciation of residential and commercial real estate is calculated by a 27.5 and 39-year lifespan respectively. Note that you will pay a "recapture of depreciation" tax; currently 25 percent on the profit you make from the sale of your rental property holdings. The good news is that your depreciation deductions over the years will be far more than that amount. You have also been able to invest the money in the best way you can since that time.
Avoid Paying the Recapture of Depreciation Tax
If you use the 1031 Exchange, you won’t pay the recapture of depreciation tax. The 1031 Exchange is an IRS code which allows rental property owners to defer taxes by selling their real estate and using the profit from that sale to buy another property. If you sell a rental property you bought some years back, you owe the IRS capital gains tax and recapture of depreciation tax on the profit. However, if you used the profit to finance the purchase of another "like kind" rental property through the 1031 Exchange, you will not pay the recapture of depreciation tax.
Note that if you use the 1031 Exchange, the deal must be closed within 180 days and the profit from the property must be deposited with a third-party intermediary until the transaction is completed. You will be liable to taxes on any portion of the profit that you withheld.
No FICA or Self-Employment Tax
The IRS does not consider income from rental property investments as "earned income." To fund their Social Security and Medicare, the two taxes most Americans pay are Self-Employment Tax or FICA (Federal Insurance Contributions Act). The employee and employer split the 15.3% tax of the FICA while a self-employed pay the total 15.3% in full. You may be exempt from paying this tax if you are a rental property investor.
How to Enjoy Tax Benefits on Real Estate
Consulting a Philadelphia property manager and an accountant on the tax implications of your rental property investments is the best way to enjoy tax benefits. It is even more critical now with the constant changes to tax laws. While Philadelphia rental property investments offer several tax benefits, you must follow the regulations to the latter to avoid running afoul of the IRS.