Understand the Tax Implications of Investment Property
You are getting ready to buy a second home. You have been pre-approved, run your credit reports and secured a pre-approval letter from a mortgage lender. You are ready to buy your real estate investment property. But, you haven’t thought about taxes. In addition to real estate taxes, you will have to be ready for income taxes as well. After all, you want this investment to make money for you!
Your investment property is a business, and you should treat it as such. You will have to put money into your business, for example, to make repairs. These expenses may be tax deductions! Keep track of them carefully. You should save your receipts and be ready to settle with the IRS (and your state) by the end of the year.
This is especially true if you have income form your investment property – which ultimately is your goal. All that income is taxable, and the rules are not straightforward. It is likely that you will need all those deductions to offset some of your income. Save some of the income you earn to pay the tax bill.
If you are going to buy an investment home, become familiar with the income tax laws surrounding property management, federal tax and state tax. Instead, you could talk to a professional tax preparer who will be informed on these issues and keep up with the changes from one year to the next. Many will be willing to prepare a tax projection for you before you even start to look for an investment property. This will help you understand what your income tax burden would be if you purchased a real estate investment. Make sure that the tax preparer models a few different scenarios for you. Unless you are extremely lucky, your real estate business is unlikely to be completely predictable. Since your tax burden will vary, you should be aware of the possibilities.
Taxes can catch you off guard, sticking you with a sizeable bill when you least expect it. Unless you have extra money sitting around, you will want to plan ahead. Have some tax projections run, so you can be ready for the IRS at the end of the year.
Remember; you can’t afford an investment property if you can’t afford the taxes!
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