Tax Implications for Rental Property Owners in North Carolina

Are you a rental property owner in the Raleigh, NC, area whose property is under-performing? Turn to Block & Associates Realty for a proven property management team that understands tax implications and occupancy guidelines. Our professionals always remain up to date about the latest tax changes. That way, you reduce the risk of compliance issues when filing your taxes.

If you and other rental property owners want to pay business taxes on time and take any legal deductions, rely on Block & Associates Realty in Raleigh and the surrounding areas.

Understanding Rental Property Tax Obligations

To avoid legal issues with your taxes, it’s important to be aware of all key tax implications. There are at least two categories that will impact you, along with two more that may or may not apply. These include:

• Federal and State income taxes
• Property taxes
• Sales and occupancy tax on short-term rentals
• Personal property taxes

Key Deductions For NC Property Owners

There are a variety of deductions you can take to make your property more profitable. For example, you can deduct your operating expenses. This includes, but is not limited to:

• Insurance premiums
• Mortgage interest
• Professional fees
• Property taxes
• Advertising expenses

You can also take the Qualified Business Income (QBI) deduction. Write off the cost of necessary repairs too, along with using any applicable depreciation credits. Property management fees are another allowable deduction.

Depreciation and Property Expenses

Depreciation and property expenses provide an easy way to reduce your taxable income. Residential properties can typically take depreciation credits over a period of 27.5 years. Please note that this only applies to the buildings themselves, not to the land.

Meanwhile, property expenses such as property management fees will bring your taxable income down. Another example is your property’s utilities, as long as your company pays for them. There are many property expense deductions available, so be sure you use them.

Repairs, Improvements, and Maintenance

Knowing the difference between how repairs and improvements affect tax reporting is vital. First up is how to take all applicable deductibles. If your deductible comes from repairs, you can deduct the full amount in the tax year you incurred the expense. However, if you made improvements to your property, your deductible gets spread out. This tax deduction lasts for 27.5 years on rental properties.

North Carolina also has specific considerations for rental property owners. Sales and Use taxes typically apply when you’re repairing something. Meanwhile, capital improvements can be exempt from these taxes, but you must meet specific substantiation requirements.

Passive Income Rules and Reporting

Most rental properties are typically considered passive income. The only exceptions to this are for real estate professionals and active participation.

Real estate professionals must meet at least two criteria. First, they must conduct 50% of their personal services in real property trades. Second, they must perform a minimum of 750 hours of services in their real property trades.

Active participation, meanwhile, enables those who meet the IRS criteria to deduct up to $25,000 in rental losses. To do so, you must:

• Prove you’ve participated in the property in a significant way.
• Own at least 10% interest in the property.
• Note that deductions begin to phase out if your Modified Adjusted Gross Income (MAGI) is between $100,000 and $150,000.

The most common classification is a default passive status, though. This is typically reported on Schedule E (Form 1040). Additionally, there is a Passive Activity Loss (PAL) limitation. In other words, IRS rules limit how passive losses can offset active income. On the bright side, you can carry passive losses forward to future tax years.

Property Management Expenses

You can deduct property management expenses because they qualify as a business expense. Therefore, you can have lower vacancy and have satisfied tenants, while simultaneously saving yourself some tax money.

Recordkeeping Requirements

There are many key categories you must track to file your taxes correctly. You’ll need all your financial records, along with current and past tenant records. There are also legal and property records you must keep on hand. Failure to meet these requirements could make an audit by the IRS more likely. Plus, it makes it harder for your own internal auditors to complete necessary year-end filings.

Stay Compliant With NC Rental Property Tax Rules

Taxes are complex, so it’s always best to ensure you remain compliant with all the rules. Our North Carolina rental property management company will ensure you’re always up to date. We’ve operated in the Triangle, Triad, Sandhills and surrounding areas since 1996. Today, we’re the Research Triangle’s largest residential property management company. Our professionals manage more than 1,000 properties in-house and have more than 2,000 under lease. We’ve also got a 4.7-star Google average from more than 2,060 satisfied clients.

Are you looking for someone to manage your apartments in the Raleigh area? Rental property owners are welcome to call Block & Associates Realty right now for more information.

Frequently Asked Questions

We understand that many questions arise when you’re looking at a new rental property management company. Therefore, we’ve put together a list of some of our most frequently asked below. If you have additional questions, feel free to give us a call.

Which Rental Property Expenses Are Tax-Deductible in North Carolina?

North Carolina offers common tax-deductible rental property expenses. These include property taxes, mortgage interest and insurance premiums. Furthermore, you can deduct utilities, property management fees, advertising, supplies, legal fees and auto expenses. Additionally, depreciation allows you to deduct certain improvements on the building.

How Does Depreciation Work for a Rental Home?

This non-tax deduction reduces your taxable rental income. It allows you to depreciate your building only and stretches out across 27.5 years. Also, don’t forget to take your depreciation allowance each year. Otherwise, you may have to pay depreciation recapture tax, even if you didn’t take your deductions.

Can Rental Property Management Fees Be Claimed as Deductions?

Yes! Choosing a rental property management company such as Block & Associates Realty is fully deductible. Be sure to keep meticulous records, however, or you may find yourself scrambling if you get audited. If you have any questions about this process, be sure to ask a tax professional.

What Records Should Rental Property Owners Keep for Tax Purposes?

It’s vital to keep all your property and legal records, financial records and tenant documentation. For instance, you must keep records on rental income, expenses and capital improvements. Keep your deed or title handy, along with contracts, insurance policies and property permits. Hold onto this documentation for seven years, just in case the IRS decides to audit you.