Rental Property Taxes and Income Taxes
The good news is that North Carolina’s property tax rates are lower than the national average: we stand at about 0.86% versus 1.08%. Because individual counties set their own rates, this varies a bit. Say that you own a home in Asheville with an assessed value of $250,000. For homes of comparable value elsewhere in the US, the property tax would be about $2700. For North Carolina, it would be significantly lower at $2140, and for Buncombe County, it’s lower still at $1743 - a difference of nearly $1000 from other states!
Keep in mind, though, that commercial property is taxed at a higher rate. That said, North Carolina is a great place to own rental property. You can also take advantage of deductions related to your rental income - which, of course, you must claim! Some ways that you can reduce your tax burden as a rental property owner:
- Deduct the property taxes on your rental property. Your property tax rate is based on the location of the property and its assessed value. You can typically deduct the property tax that you pay from your income taxes, bringing your taxable income down.
- Deduct mortgage interest. Mortgage interest on your rental property is considered a business expense, and so it is deductible. You will receive a Form 1098 from your lender which tells you how much interest you’ve paid for the year sometime in January or early February. Plug this into your tax forms or file it away for your bookkeeper or accountant.
- Deduct depreciation. We know that our cars depreciate - but so do rental properties, albeit it a much slower rate! Like any business asset, yes, your property can become less valuable over time (typically 27.5 years). You can deduct depreciation each year - but it’s complex. Best have a tax preparation professional help you make the most of this deduction.
- Deduct repairs. Most of the time, the cost of repairs (e.g. fixing a patch of drywall) is deductible, as is the cost of certain supplies, materials, and maintenance that you pay for in order to keep your property in good condition.
This can be a tricky area, and we’ve seen many property owners who have misclassified repairs. Costs related to improving your property are not deductible. Say, for instance, that you purchase a property for $200,000 and spend $20,000 adding another bedroom. That cost gets capitalized and becomes part of your basis (i.e. what you paid for the property). In other words, the IRS now looks at it as if you’d paid $220,000 for your property. Some other examples of capitalized costs, or capital improvements:
- Landscaping
- Storm windows
- New roofs
- New flooring
- Insulation
- Water heaters
- HVAC systems
- Security systems
If your repair deductions are too many given the size or value of your property, it sends a red flag to the IRS. You cannot deduct capital improvements.
- Deduct other allowable expenses. In addition, you may be able to deduct transportation expenses related to collecting rent and managing/maintaining your property, advertising, insurance, utilities, yard maintenance (not improvement), equipment rental, pest control, trash removal, etc.
More good news: the fees you pay for professional property management services are also deductible.
You may not deduct for travel expenses incurred between your home to the rental property, uncollected rent (depending on your accounting method), income lost through vacancies.
It’s a good idea to have a tax preparer look at your situation and help you make the most of these deductions.
Owning a rental property is certainly complex. Asheville Phoenix Properties can make it much more manageable with a range of services, including advertising, tenant screening, rent collection, property inspections, and walk-throughs, tenant communication and disputes, arranging repairs, and preparing end-of-year reports. Not only does this make your life as a property owner easier - you can deduct it on your taxes! Contact us today.