Income Tax And Rental Properties: Some Things To Consider

With a population of close to three million, Chicago is America’s third largest city. In terms of the housing market, this translates into 1,194,337 households within the metropolitan limits, about half of Illinois’ grand total. Since the affordability of properties has gradually returned to stable levels following the 2008 financial crisis, we at Accounting Solutions Ltd. have had more and more clients coming to us with questions regarding how to handle their taxes for properties that they rent.
 
Some of the more frequent queries revolve around the viability of purchasing property. Many people are uncertain as to whether owning a real estate investment property is a sound financial decision. As experienced CPAs, we help our clients reach a verdict on a case by case basis, but generally are able to determine eligibility by examining a number of key factors:

  • Rental income= how much do you plan on charging for rent? How does this sit in comparison to the rest of the market?
  • Cash flow= how does this purchase fit in with your overall financial health?
  • Renovation costs= has the property been assessed? Have you calculated the approximate costs of hiring contractors to perform renovations, or do you plan on doing touch ups yourself?
  • Financing= have you spoken with your bank, and if so, have the verified credit required in order to take out a loan?
  • Risk= how much thought have you put into issues with tenants, fluctuating markets, property assessors valuing your home at a lower price than expected?
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    If you feel that you have a handle on the overall costs and risks associated with your purchase, you may be able to move forwards with your acquisition, which is where another monetary conundrum enters the picture- contemplating the tax effects of your rental property.
     
    One of the key pieces of information that is vital to understand as a landlord revolves around the IRS 1040 form. This is filled out annually and determines the overall income tax that you must pay for that fiscal year. The form breaks down all of your earnings including salary, wages, and distributions, and also subtracts any deductions that you may be eligible for. The overall taxable income number that is derived from these calculations can be measured against your tax filing status (relating to marital status etc) in order to resolve your final taxable income amount.
     
    The IRS 1040 form also looks at the aforementioned digits and counters them against what you have already paid throughout the year. Many of our clients make these payments through quarterly deals with the IRS, or by having set deductions from their salaries. After sorting out these numbers, one is able to determine whether or not they owe money or are eligible to claim returns.
     
    While filing for these taxes as a landlord, one must utilize depreciation write-down in order to determine which deductions will lower your overall income taxes. There is often a erroneous assumption made that depreciation revolves around the slow degradation of the property itself, with maintenance costs slowly draining value and therefore generating larger returns. This is not necessarily true, as it instead refers to the costs needed to maintain a property over its ‘useful life’. The home that you are renting may be in perfect condition, but would still make you eligible to claim this return.
     
    By consoling with a CPA, landlords can break down the depreciation and calculate how this deduction will be implemented alongside any losses associated with taxed rental income. It is important to note that the amount of money that you save is dependent on your income level and filing status, factors that ultimately steer the course of your IRS 1040 form.
     
    Becoming the owner of a rental property within Chicago can certainly be a profitable venture, but it is important to be able to calculate exactly how this financial entity fits within your overall annual tax scheme. With so many factors at play, including your cash flow, investments, and overall risk, we always recommend consoling with a experienced CPA prior to diving deeper into making your purchase. Fortunately, we have decades of cumulative experience over at Accounting Solutions Ltd, and are excited to turn your property owning ambitions into a viable reality.

Chris Amundson is President of Accounting Solutions Ltd. located in Chicago, Illinois

Chicago Accounting Firm & Tax Solutions for Small Businesses

Last updated on October 12, 2018
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