Calculating the Costs of Taxation on Rental Property

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Calculating the Costs of Taxation

Nothing can beat the joy of owning your own house. For those who own more than a single house, converting it into a rental property is undoubtedly a great idea. All of us love earning a few extra bucks, don’t we? Owning a bed and breakfast establishment in one of the picturesque holiday spots happens to be a dream of many. For those who are tired of working for corporates, owning a small business such as this happens to be a great little escape from the trials and tribulations of everyday life. It’s a nice little way to earn a living as well.

But hold on, all kinds of incomes generated from property investments are taxable. While calculating the taxable income on rental property, it is extremely important to distinguish between primary residences and rented properties.

Nothing can beat the joy of owning your own house. For those who own more than a single house, converting it into a rental property is undoubtedly a great idea. All of us love earning a few extra bucks, don’t we? Owning a bed and breakfast establishment in one of the picturesque holiday spots happens to be a dream of many. For those who are tired of working for corporates, owning a small business such as this happens to be a great little escape from the trials and tribulations of everyday life. It’s a nice little way to earn a living as well.

Also, buying a house or purchasing an asset is bound to give you emotional satisfaction. It is something that gives you long-term benefits. Buying an asset (say a house) is a long-term investment that will benefit you in the long run.

But hold on, all kinds of incomes generated from property investments are taxable. While calculating the taxable income on rental property, it is extremely important to distinguish between primary residences and rented properties.

Why avail a loan to buy a property?

Getting a loan isn’t all that difficult. In fact, availing a flexible home loan happens to be a great way of raising funds in order to buy a house.

The benefits

Ready-to-use funds

It goes without saying that availing a loan gives you instant access to finances. Once the loan is approved and the amount is transferred into your bank account, you can use the amount the way you want. Buy the thing you’ve been dreaming to own with easy to avail same day payday loans from Finance27. You’d get easy-to-avail same-day loans over hear. The interest rates are easy to manage and the repayment tenures are quite flexible.

Collateral-free loans

Submit a collateral, get the paperwork done, and you are good to go. There are quite a few financial companies and other establishments offering you same day loan facility with minimal paperwork and no collateral. In this way, you can avail the loan without any security and can repay it without having to disturb your monthly budget.

Flexible repayment tenures

It goes without saying that you can choose a repayment tenure as per your convenience while availing a loan facility.  The loan can be repaid in monthly installments without creating a hole in your pocket.

Asset Appreciation

Also, availing a loan is an economically feasible option if you are planning to buy an asset. For instance: if you avail a loan in order to buy a house worth US$100,000, the loan amount (i.e. US$100,000) would be the amount you’d have to pay back. There’s every possibility that the prices of the property owned by you shoot up in the near future. In this way, the appreciation that occurs can be treated as a profit.

The Tax Factor:

The major difference between rental properties and primary settlements

Primary residences are used by the owner himself. Therefore, there is no taxable income being generated from them. All the expenses are borne by the owner himself. All the expenses incurred are personal in nature and cannot be deducted from the owner’s personal income. On the other hand, there is taxable income generated from rental properties. Income generated herein is directly taxable. All types of costs incurred in order to maintain a rental property are deductible while calculating the income generated from the property.

An important factor to be taken into consideration is that all expenses are deductible from the rental income itself.,This has to be done before calculating the tax. The costs included herein can be property management fees, insurance premiums, etc.

Rental properties can include:

  • Lodges
  • Motels
  • Apartments and flats
  • Breakfast and bed establishments
  • Guesthouses
  • Farmhouses and shops

Calculating tax on the income generated

The income generated post deducting the expenses can then be included to other taxable incomes you might have. you get should be added to any other taxable income you may have. Any kind of amount that you receive apart from rental income is also taxable.

Lump sum amounts paid such as lease premiums are taxable in the year in which they are received. The full amount is taxable. However, there are exceptions to this rule: If a tenant pays a refundable deposit, it is not taxable. Amounts such as this one are to be kept under a separate trust account.

What if the expenses incurred exceed the income?

Now, this one is important, in case the expenses incurred exceed your rental income, the corresponding loss needs to be kept against other forms of income received by the owner.

Which of the expenses cannot be included?

Some believe that repairs and maintenance costs are specific in nature and therefore should not be included. These should not be confused with improvement costs.

To conclude the argument

So, the next time you plan to buy a property or any other asset. Keep in mind the taxations applicable. It will not only help you keep track of your incomes, but would also let you calculate whether the property you’re investing in is actually profitable or not. Not just that, it will also help you plan for taxation in a better way.