The only way you can maximize your rental income is by minimizing your expenses. While there are many ways to go about it, taking advantage of tax benefits is often the best place to start.
In places like Denver, real estate tax breaks can cut your annual rental property by thousands of dollars.
It’s a smart investment of your time to learn everything you can about these tax benefits.
You’re probably wondering: how can I maximize my rental income by exploring my tax benefits?
Keep on reading to know more about the tax benefits of investing in Denver, CO real estate that can save you big in the long run.
Some Common Tax Benefits of Investing in Denver Real Estate
Are you taking full advantage of your tax benefits?
To be sure, here’s a list of the most popular tax breaks for real estate investors in Denver:
1. Depreciation Expenses
What is a depreciation expense? According to the IRS, rental properties have a productive life of 27.5 years.
That means that as each year passes, your property losses its productive value.
Basically, they allow you to write-off a depreciation expense each year from your gross taxable rental income.
This expense covers the “wear and tear” or “exhaustion” of your property.
To calculate how big your depreciation deduction is, you use this formula:
Annual Depreciation = Actual Value of the Property
If your rental property is worth $150,000, your annual depreciation expense would be $5,455 ($150,000 / 27.5).
Now, if the same property yields around $30,000 in rent, taking advantage of your depreciation benefit would mean:
- A smaller taxable rental income.
- And, as a result, a smaller tax burden.
Sounds great, right? That’s not all.
2. Maintenance and Repair Expenses
That’s right. You can deduct the expenses you incur to maintain and repair your rental property.
These expenses range from cleaning, fixing roofing leaks, repairing broken plumbing, replacing broken windows, repainting, and so on.
Any expense you incur to maintain, preserve, or repair your property counts as a deductible.
If you add up all these expenses together with your depreciation expense, you’ll be left with an even smaller taxable income.
3. Mortgage and Home Improvement Loan Interest Payments
Did you use a mortgage to buy your rental property ?
Are you paying back a home improvement loan you took for your rental property?
Or better yet, have you been using your credit card to buy products and services for your rental property?
If so, you are in luck – tax-wise.
In Denver, like most parts of America, real estate investors can write-off interest payments from their taxable rental income.
Whether it is the interest on your mortgage, home improvement loan, or credit cards used for rental property business, all of them count as tax deductions.
4. Travel Expenses
Traveling to your property can be quite expensive, especially if you live miles away from it.
Fortunately, all the travel expenses you incur for rental activities are also tax deductibles.
Some of them include:
- Fuel expenses
- Vehicle repair expenses (if it broke down while you were fulfilling rental-related activities)
- Plane tickets
- Hotel accommodation and meal expenses if you stay overnight
- Upkeep costs
As you calculate your net annual taxable income, make sure you deduct all the expenses you incur due to your rental property.
Warning: you should note that the IRS often takes travel expense deductions very seriously. Make sure you fully document these expenses (in terms of receipts).
5. Employee and Management Costs
Employee salaries and property management fees also fall under tax-deductible expenses.
That means that you can write-off the expenses you incur to hire and maintain a:
- Property manager
- Cleaner or housekeeper
- Security personnel
- Or any other type of employee working in your rental property
This deductible, alone, can cut your gross taxable income by a very large percentage.
6. Long-Term Capital Gains
Do you know that holding a rental property for longer than a year has its own tax benefits?
If not, then you should note that long-term capital gains are often subjected to lower tax rates.
That means that when you sell your rental property after owning it for more than a year, you’ll have a smaller tax burden.
7. The 1031 Exchange
As stated in Section 1031 of the Internal Revenue Code, this exchange allows for property swapping with minimal or no tax obligations.
That simply means that you can use this tax break to get a new property without having to worry about taxes.
In fact, the 1031 exchange allows you to pass your capital gains from one property to another with ease.
However, you must be eligible to enjoy this tax benefit. You have to meet a few conditions including:
- Both properties must be like-kind.
- The new property has to be equal or worth more than your old property.
- The property has to be for productive business purposes and not personal use.
In summary, there are a lot of tax benefits you can take advantage of as a real estate investor in Denver.
Remember, rental real estate can be a big investment. Any chance you get to minimize your expenses and maximizing your income counts to your overall success.