Being the owner of a rental property in Austin, Texas brings you a number of benefits. Your Austin rental home straddles the line between a business and an investment and can typically receive generous write-offs and tax advantages. As we near 2020's extended tax deadline, our team at Stone Oak Property Management wanted to review some of the tax benefits landlords in Austin, Texas can take advantage of with their rental property.
Tax-Sheltered Growth
Regardless of your goals with your rental property, one thing most landlords count on is appreciation and their property gaining value every year. A portion of that growth comes from just making the mortgage payment on your home every month. Just by doing that your equity ownership in the property will increase!
Another portion of your tax-sheltered growth comes from owning the rental property in a healthy real estate market, or in your case, it can also be due to growing net operating income for your rental. The IRS will not recognize this growth in capital gains until you sell your rental property and your money will continue to grow as long as it remains in your Austin rental property!
Tax Sheltered Cash Flow
You will only be taxed by the IRS on the profit you earn from your rental property. To calculate your profit, you'd add all of your rental income and subtract your expenses from that total. Some of these expenses include mortgage payments (don't forget the interest!), repairs for your tenants, Austin property management fees & property taxes. Your expenses can even be for travel! For example, if you live out of state and own a rental property in Austin, any fees associated with a trip to Austin to work on the home would be tax-deductible!
Also, depreciation of your Austin rental property allows you to write off a portion of your property's purchase price every year as a way of acknowledging that it gradually wears out. It's not even required for you to spend anything to get the depreciation deduction, it just allows for you to cancel out income from elsewhere which in turn reduces your tax liability.
'Passive Activity Loss' Deductions
With the variety of expenses one can claim on their Austin rental property, it's not difficult to end up with a taxable loss. Typically when dealing with investments, you can't use losses from passive activities to offset income that you earned elsewhere (your job, etc). However, there is this neat little trick with your rental property that allows you to claim up to $25,000 in passive activity losses from rental real estate against your regular income. One must qualify for this benefit to take advantage of it though.
Tax-Free Rental Property Exchanges
Want to sell your rental property but not remove yourself from being the owner of a rental property? If you sell your Austin rental home to buy more investment real estate, even if it's a different type of in another state, you can structure the sale as a tax-deferred exchange. Essentially, you can carry the cost basis of your old property into your new property(s). The IRS doesn't look at this as a sale of the property so you won't be on the hook for capital gains taxes or depreciation recapture taxes on the exchange. Win-WIn!
Have more questions about the tax advantages of your rental property in Austin? Please don't hesitate to contact our Austin property management team at Stone Oak if we can help!
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