By Louise Bolger
Rental property offers tax advantages
sun staff writer
It's mid-April, the absolute best month on the west coast of Florida. It's also tax time, not as much fun, and by now too late for making any substantial changes to your 2006 taxable life. But there is an entire year between now and next April 15, and if you have found yourself in the position of owning property that hasn't sold yet in our funky real estate market, now may be the time to start thinking about renting it.
Owning rental property is one of life's challenges, it can be wonderfully fulfilling or bring on a depression that will have you running to your doctor. If, however, renting your home in order to move on with your life is the best answer, there are many tax advantages that could make the decision easier.
Just like your primary residence, you can deduct mortgage interest and property taxes on your rental property. In addition, you can deduct improvements and any interest on loans for improvements as well as operating expenses like insurance, management fees, advertising, utilities, community association dues, landscaping and garbage disposal. Also, any unexpected losses resulting from theft or vandals, damage due to fire, floods, hurricanes or other weather related events not covered by insurance can be deducted.
Rental properties can also be depreciated over a period of years resulting in a substantial annual tax deduction. Depreciation is tricky, however, since it changes the cost basis of the property affecting any future gains or losses. Expert help is essential.
Travel expenses associated with rental property are also deductible, whether you are driving locally or flying across the country. If you use your personal automobile to check your property, a portion of gasoline, upkeep and repairs can be deducted, as well as air fare, hotels and meals out of your area, but keep very detailed records since the IRS carefully scrutinizes these types of deductions. Home office expenses may also qualify for IRS deductions, but again these are the types of deductions that the IRS love to go over with a fine tooth comb.
Also, in order to qualify a property as a rental, it must be rented out for more than 14 days a year. If you intend to use your Anna Maria home or condo for personal use, it can only be for 14 days a year or 10 percent of the total rental days, whichever is greater.
Tax deductions are not the only benefit of owning rental and investment property. Purchasing and holding on to rental property long term is one of the best investments you can make. Long-term real estate values go up, especially if you're fortunate and smart enough to buy in a slightly down market, and it is not as volatile as the stock market (more about this next week).
Before you purchase future rental property or rent out your existing property, be sure to check out any condominium association restrictions regarding number and length of time rentals are permitted, as well as any deed restrictions that may affect a future renter in a single family home, for example, no boats, trailers and RVs permitted in driveways.
Protect yourself with a credit history on a prospective tenant for annual rentals, and learn and understand the state and federal fair housing laws. You, of course, can't discriminate against people, but if you don't want pets in your rental, they can be excluded from the lease.
If it looks like renting a property you can't sell in today's market is the right decision for you, do your homework. Get professional tax advice to help you crunch the tax numbers and professional real estate advice to project what income can be generated.
It may be too late for this year, but next year is only 12 months away and taxes, and you know what else, are unfortunately inevitable.