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Te tax law recognizes that you must spend money on your rental properties for such things as mortgage interest, repairs, maintenance, and many other expenses.
The law allows you to subtract these expenses, plus an amount for the depreciation of your property, from your effective gross rental income (all the money actually earned from the property) to determine your “taxable income.” you pay income tax only on your taxable income, if any. Expenses you can deduct from your income are called tax deductions or tax write-offs.
although some tax deduction calculations can get a bit complicated, the basic math is simple: Te entire tax regimen for rental real estate can be reduced to the following simple equation: Effective Gross Rental Income minus Operating Expenses (including mortgage interest) minus Depreciation and Amortization Expenses = Taxable Income many landlords have so many deductions that they end up with a net loss when they subtract all their deductions from their effective gross rental income. in that situation, they owe no tax at all on their rental income. This is especially common in the early years of owning rental property, when you haven’t had time to raise the rents much. indeed, it is common for landlords to have a loss for tax purposes even if they take in more in rental income than they pay in expenses each month. having a tax loss on your rental property is not necessarily a bad thing. you may be able to deduct it from other income you earn during the year, such as salary income from a job or income from other investments. however, there are significant restrictions on a landlord’s ability to deduct rental losses from nonrental income. many small landlords can avoid them, but not all. |
Income Tax Guide