One of the financial responsibilities of owning a rental property is paying property taxes. Property taxes by state or local government are used to fund public services and community projects such as law enforcement, fire departments, public recreation, road construction, libraries, and schools. As a rental owner, you will be required to pay property taxes in 2020 and every year of ownership, even long after you have completed your mortgage payments.
How Are Rental Property Taxes Calculated?
Property taxes are calculated based on the assessed value of your real estate investment, including the land and any structures on it. The value of your income property is determined every one to five years by a property tax assessor. The most basic method is to assess the fair market value (FMV) of your property. To establish fair market value, the assessor will compare your rental property to other similar rentals (rental comps) in the neighborhood. Assessors might also look at the value of any recent renovations you have made, the replacement cost of the rental property, and any rental income potential.
To figure out your tax bill, multiply the local tax rate by the assessed value. For example, if the local tax rate is 1.5% and your investment property has an assessed value of $250,000, then you would owe $3,750 in property taxes.
Related: Highest and Lowest Property Tax Rates by State
How to Lower Property Taxes in 2020
Many investors pay more real estate taxes than necessary on their rental income because they are not aware of the tax deductions available to them. The IRS allows you to deduct some costs involved in running your rental property.
Wondering how to lower property taxes? Here are some of the rental property tax deductions you need to take advantage of in 2020:
1. Loan interest
If you used a mortgage to buy rental properties, your loan interest will be the biggest deductible expense come tax season. In addition, you can deduct credit card interest for rental property expenditures, as well as interest on loans borrowed for improvements. Consult a financial advisor or accountant to find out which interest charges can help in lowering property taxes.
2. Depreciation of rental property
Rental property depreciation is based on the theory that property loses value over time due to wear and tear. You can claim depreciation once your residential property (condo, single family home, multi family home, etc.) is available for rent, even if it doesn’t have any occupants yet. However, the deduction must be spread over the expected life span of the property.
3. Maintenance and repairs
Repair and maintenance costs such as landscaping, fumigation, cleaning HVAC filters, and painting qualify for deduction. If you hire a contractor to get the work done, you can also deduct their labor costs. Even if you choose to do the work yourself, you can deduct any expenses for equipment and tools. On the same principle, condo fees and homeowner association fees also qualify for deduction.
Related: Maintenance Myths for Beginner Landlords
4. Utilities
After investing in real estate, you might decide to pay for utilities such as AC, heating, water, electricity, and gas for your tenant. In such a case, the expenditure on utilities will be tax-deductible. If you pay for satellite, cable or internet, you can also deduct those expenses.
5. Legal and professional fees
When it comes to how to lower property taxes, professional fees related to your rental property are deductible. This includes accountant fees, lawyer fees, real estate agent commissions, and property management fees. In case of an eviction, you can deduct the legal and court filing fees. Expenses incurred in advertising your rental property on the radio, newspaper or online can also be deducted.
6. Travel
Every expense incurred for driving related to your investment property is deductible. This includes driving to the hardware store to buy materials for repair and driving to your rental property to handle an emergency. If you drive a pickup, a van or an SUV for your rental activity, there are two options for deducting travel expenses:
- Use the standard mileage rate approved by the IRS
- Deduct the actual expenses (repairs, upkeep, gasoline)
In case you travel overnight, meals, hotel bills, and airfare can be deducted. Be sure to keep proper records of your long-distance travel expenses.
Besides taking advantage of rental property tax deductions, here are other considerations for lowering property taxes:
7. Think before making improvements
To transform your rental property into a dream home, you might want to add some fancy features or structures in and around the property. This could be anything from an indoor gym to an outdoor pool. While such improvements would be great for attracting tenants, they don’t help in lowering property taxes. Therefore, before putting up any permanent fixture on your investment property, be sure to find out what the tax implications would be. You can consult a local tax assessor to find out what you might be required to pay if you build.
8. Compare homes in the area
Since property tax information is available to the public, you can find out how your rental property’s assessed value compares to similar homes (real estate comps) in your area. If your property is valued much higher, then it could be a sign that there was a problem with your property’s valuation. In such a case, you could consider hiring an independent home appraiser to get a second opinion. Make sure the appraiser is a member of a professional body (like the American Society of Appraisers or the National Association of Independent Fee Appraisers). In addition, the appraiser should have experience assessing your kind of investment property.
Related: How to Do a Comparative Real Estate Market Analysis
9. Appeal your assessment
Real estate investors know that tax assessors are not always right. To avoid paying high property taxes, be sure to check your assessments for errors. Visit your local assessor’s office and ask for a copy of your property card. This information could also be accessible online from your county administrator’s office. Peruse the card and look for errors in the number of bathrooms and bedrooms, square footage, the type of cooling/heating, and the year of construction. Don’t forget to check for discrepancies on improvements, special features, and the structural condition of your property.
If you come across mistakes on your property card, you have the right to file an appeal within the required deadline. If you win the case, this can help in lowering property taxes.
10. Check property tax history before buying an investment property
Be sure to check property tax history before buying an investment property. You will be able to determine how much you’ll pay in taxes and if you can afford it. This will help you be prepared by the time tax season comes around. You can easily check the tax history of any property for sale on Mashvisor. Sign up now to get started.
Conclusion
As you can see, lowering your property tax bill in 2020 is not very difficult. These tips on how to lower property taxes could make the difference between making a great return on investment on rental property and losing money.
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