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Converting Your Home to a Rental Property

by | Sep 7, 2022 | Taxes & Your Savings

converting home to rental property

Real estate has long been considered one of the greatest long-term investments. Further, with the trend of minimalist living, many are turning their primary residences into rental properties. While converting your home to a rental property comes with passive income and tax benefits, it’s important to note the tax implications as well.

Benefits of Converting Your Primary Residence to a Rental Property 

Passive income is just one of the benefits of converting your home into rental property, but there are plenty of others. 

Tax Deductions 

Deducting the expenses related to your rental property can decrease the income reported on your tax return. Every property is different, but the most common expenses you can deduct include: 

  • Cleaning and maintenance 
  • Property taxes 
  • Commission fees 
  • Repairs  
  • Insurance 
  • Mortgage interest 

Depreciation Expenses 

The IRS allows you to depreciate your rental property over a 27.5-year period in order to account for things like wear and tear and deterioration. Taxpayers can do this by taking the value of their home at the time of conversion, less the land value, and then dividing it by 27.5 years to calculate the annual depreciation expense. If your depreciation expense is greater than your rental income in a given year, no taxes are owed on the income.  

Tax Impact of Selling a Rental Property 

While the benefits sound nice, it is critical to understand the tax implications that come with not only owning a rental property, but also those that accompany selling one.  

Capital Gains 

In the selling process, timing is everything because it will determine the amount of capital gains tax paid, if any. Capital gains tax is tax owed on the profit earned on an asset upon selling it. It can be found by a simple calculation: 

Final Sale Price – (Asset’s Original Cost + Expenses Incurred) 

The IRS Section 121 exclusion allows taxpayers to exclude up to $250,000 of the gain from the sale of your rental property. The amount increases to $500,000 if married filing jointly. To qualify, the taxpayer must own and use the property as their primary residence for two of the past five years. If a taxpayer sells their residence during a time of using the property as their primary residence for only one of the past five years, they would no longer be eligible for the Section 121 exclusion. In this case, the taxpayer would need to report the gain of the sale in their taxable income.  

Tax Debt Relief for Rental Property Owners 

Tax implications revolving real estate can be extremely tricky. If you’re planning on converting your home to a rental property, it’s important to make sure you are keeping track of all rental property expenses and income to ensure accurate reporting during tax time. If you need tax help, give us a call at 800-536-0734 for a free consultation. 

Biden Announces Student Loan Forgiveness Plan

by | Sep 1, 2022 | Tax News

Biden Announces Student Loan Forgiveness Plan

President Biden has announced his three-part student loan forgiveness plan that aims to provide relief to student loan borrowers, especially those belonging to low– and mid-income levels.  

Part I: Student Loan Forgiveness for Eligible Borrowers 

Borrowers with individual incomes less than $125,000, or $250,000 for married couples, are eligible for student loan forgiveness up to $20,000. The Department of Education will cancel up to $20,000 in student loan debt to borrowers who received a Pell Grant and had loans held by the Department of Education. Those who did not receive a Pell Grant will receive up to $10,000 in debt cancellation. Since this plan will not benefit high-income households, the Biden administration has extended the pause on loan repayments once more until January 2023.  

Part II: Manageable Loan System for All Borrowers  

The Department of Education proposed a new repayment plan that will replace the current income-driven plan in place. It will prevent low-income borrowers from committing to monthly payments of more than 5% of their discretionary income, a drop from the current 10%. This would lead to an average savings of $1,000 per year for both current and future borrowers.  

In addition, they will expand on the recent improvements to the Public Service Loan Forgiveness (PSLF) program. More than 175,000 public servants have had $10 billion in student loans canceled and the Department of Education expects these numbers to increase. Public servants include nonprofit workers, military members, and officials working in federal, state, local, or tribe level governments.  

Part III: Reduced Cost of College  

Earlier this year, President Biden approved the largest increase to Pell Grants since 2009, a bill that doubled the size of the maximum Pell Grant to $6,895. In addition to making tuition costs more manageable, the Biden administration has also taken steps to hold colleges accountable for keeping reasonable tuition costs, as well as ensuring students are receiving the value for their investments in higher education.  

Assuming every eligible borrower takes advantage of this plan, it will completely cancel student loans for nearly 20 million borrowers, as well as partially cancel student loan debt for 43 million others.  

Tax Debt Relief for Student Loan Borrowers 

The debt relief in Biden’s Student Loan Forgiveness Plan will not be treated as taxable income for the federal income tax purposes. However, borrowers should remain mindful of available tax breaks and filing requirements. If you need tax help, give us a call at 800-536-0734 for a free consultation today.