Unintentional landlords sometimes struggle to treat their rental property as a business. Today, we’re sharing a few tips on how to do that.
If you’re an unintentional landlord, you probably fall into one of two groups. Either you’re taking care of the property for a parent, or you’re moving out of town for business and you don’t want to sell your home. Either way, you didn’t intentionally buy real estate for rental purposes.
Removing an Emotional Connection
If you’re taking care of the home where you grew up, it can be difficult to think of it as an investment. Some of our clients are 50 years later renting out the home where they spent their childhood. They are a little uptight and want to be careful about who is in that home. The mistake is that they continue thinking about the property as a home. As soon as you rent it out, it becomes an investment.
Take Advantage of Depreciation
There are financial benefits to seeing your rental property as a business. Most people forget to depreciate the value of their house and write off all their expenses. Without giving you CPA advice, I can tell you that you should write off your management fees, maintenance costs, and property taxes that are associated with the cost of running your own small business. So, work with a CPA who knows rental properties. It’s time to get away from the Turbo Tax, DIY mentality. Get someone who knows what they are doing.
Understanding Tax Law
If you’re taking care of a property for a parent, there are benefits to waiting to sell until your mother or father passes. That may sound greedy or morbid, but there is a step up available if your parent passes and ownership passes down to you. It can save you hundreds of thousands of dollars in value. Do some research, and be aware of the potential you have to increase your ROI by avoiding taxes.
1031 Tax Deferred Exchanges
There are also 1031 tax deferred exchanges. These are benefits if you want to sell your property but you don’t want to pay $200,000 or $300,000 in taxes. We helped someone sell a property she had for 35 years. Her capital gains taxes would have been a quarter of a million dollars. If you’re not in a position to pay those taxes, reinvest your property through a tax deferred exchange. That’s an option for you to discuss with your CPA. If you want to keep investing but need a larger cap rate, you can do a tax deferred exchange where you sell and reinvest the funds into another property or group of properties in a higher return area.
Primary Residence Exclusion
If you’re relocating for work, a primary residence capital gains exclusion can work for you. If you lived in the property for 24 out of the last 60 months before selling it, you can write off some of what you earn. A single person can write off up to $250,000, and a married couple can write off $500,000. This isn’t tax deferred; you never have to pay it. So, maybe you lived in the property for two and a half years and then rented it out for two and a half years. You can take advantage of this tax break.
I’m not a CPA, and I can’t give you that professional advice. My experience as a property manager and an investor suggests that you do your research and talk to a great CPA who can advise you on these things.