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Year-End Tax Planning for Rental Property Owners

As the year draws to a close, tax planning for rental properties can save you money, optimize deductions, and streamline your tax reporting for the upcoming year. Whether you have one or several rental properties, a little proactive planning can make a massive difference when it comes to your overall tax efficiency- and your stress level at tax time.

Here are 7 things you should be consider now if you own one or more rental properties.

1. Depreciation Recapture

One of the biggest benefits of owning rental property is the ability to depreciate the property's value over its useful life. But remember, when you sell, you might have to "recapture" some of that depreciation, which can increase your tax liability. Ensure you understand how much depreciation you've claimed and how it will impact your taxes upon sale.

2. Consider a 1031 Exchange

If you're thinking about selling a property and buying another, consider a 1031 Exchange. This allows you to defer paying capital gains taxes by reinvesting the proceeds from a sold property into a like-kind property.

3. Evaluate Rental Income & Expenses

Take a detailed look at your rental income and all associated expenses. This isn't just about calculating profitability, but also about optimizing tax deductions. Ensure you've recorded all possible deductible expenses, such as maintenance costs, property management fees, and mortgage interest.

4. Prepay Expenses

If you anticipate higher income this year and want to reduce your taxable income, consider prepaying some of next year's expenses. This can include items like property taxes, insurance, or even utility bills. Prepaying can offer a financial cushion and help lower this year’s tax bill.

5. Consider Passive Activity Losses

If you have passive activity losses (when your operating expenses exceed your rental income), remember they can only offset passive activity income. Unused passive losses can be carried forward to offset future passive income or claimed when you sell the property.

6. Have a Professional in Your Corner

Tax laws, especially those surrounding real estate, change frequently. If you have one or more rental properties, be sure to engage with a CPA who has expertise in tax planning and strategy for rental investments to ensure you're leveraging every possible benefit and staying compliant.

While DIY for tax preparation can be tempting, professional advice will help you maximize the return on your investment and minimize surprises and expensive tax headaches.We’re here to help. At Iota Financial, we specialize in guiding rental property owners through the maze of financial planning and tax optimization. Schedule a complimentary consultation, and head into the new year with confidence.

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