I want to give you a quick-and-dirty snapshot of some of the important tax considerations of rental properties, if you are not already somewhat versed in rental income. Be aware that this is just a brief introduction, far short of a comprehensive study of passive income taxation!

In my recent blog posts about your strategies for flipping vs. renting (Strategic Decisions: Capital Gains vs Passive Income and Strategic Decisions: A Dual Approach) I mentioned that rental income is taxed as passive income, and receives better tax treatment than either earned income (salaries and wages) or capital gains (profits on flip projects, and other types of investments). How does that work?

Deductions from taxable rental income

• the expenses of maintaining and repairing your property
• depreciation
• the interest on any mortgage loan you carry on the property

Basics you need to know about depreciation

If you are new to this calculation, understand that your mortgage payment (if any) is not a deduction. Instead, the deduction is the depreciation calculation, along with the interest component of your mortgage payment. If you own the property outright and don’t have a mortgage, you still benefit from the depreciation deduction.

Depreciation is normally calculated as a straight-line number, meaning the same amount of depreciation is deducted each year. In the early years of your mortgage loan, your payment consists mostly of interest and very little principal reduction. The benefit is that you are deducting both the depreciation and the full amount of the interest paid.

Tax considerations of selling your rental property

Selling a rental property opens up many possibilities for variations in tax treatment, based on the property, improvements made and your other income. There may be different tax rates on portions of the gains. It’s essential to get qualified advice on your personal tax ramifications before you sell. It is quite likely that you have opportunities to reduce the tax impact, but you must plan accordingly.

Summary of the tax ramifications of rental properties

Tax rules on rental properties can be complex, and vary by the investor’s overall financial picture, but are usually beneficial compared with taxable income from flipping. This is another aspect of real estate investing that demands a depth of knowledge and experience that is best left to the specialists.

I do hope to make you more aware of the opportunities of rentals, including this general information of the usually beneficial tax considerations of including rental properties in your successful real estate portfolio.