Real Estate & Rental Industry Specific Tax Regulations
1. Rental Income and Reporting
- What It Is: All rental income received from tenants must be reported as income on tax returns.
- Who It Applies To: Landlords, property management companies, and real estate investors.
- Tax Implications: Rental income includes all payments received from tenants, such as rent, advance rent, security deposits (under certain conditions), and payments for lease cancellation. It must be reported in the year it is received.
- What It Is: Real estate investors can depreciate the cost of buildings and certain improvements over a specified period.
- Who It Applies To: Owners of rental properties and commercial real estate.
- Tax Implications: Residential rental property is typically depreciated over 27.5 years, while commercial property is depreciated over 39 years. Land itself is not depreciable. Depreciation reduces taxable income but must be recaptured upon the sale of the property.
- What It Is: A 1031 exchange allows real estate investors to defer capital gains taxes by reinvesting proceeds from the sale of one property into another like-kind property.
- Who It Applies To: Real estate investors looking to defer capital gains taxes.
- Tax Implications: The exchange must meet specific IRS rules, including timelines, to qualify for tax deferral. The basis in the new property is adjusted to reflect the deferred gain.
- What It Is: Losses from rental real estate activities are generally considered passive and can only offset passive income unless the taxpayer qualifies as a real estate professional.
- Who It Applies To: Landlords and real estate investors who do not materially participate in their rental activities.
- Tax Implications: Passive losses can be carried forward to offset future passive income. However, if the taxpayer qualifies as a real estate professional, they may deduct losses against ordinary income.
- What It Is: Real estate professionals are allowed to deduct rental real estate losses against their non-passive income if they meet specific IRS criteria.
- Who It Applies To: Individuals materially involved in real estate activities, including property management, development, and brokerage.
- Tax Implications: To qualify, a taxpayer must spend more than 750 hours a year in real estate activities and must spend more than 50% of their total working hours in the real estate trade or business.
- What It Is: Mortgage interest paid on loans used to purchase or improve rental properties is deductible as an expense.
- Who It Applies To: Owners of rental properties with mortgage debt.
- Tax Implications: The deduction can significantly reduce taxable rental income. However, interest on personal loans used to purchase rental property is not deductible.
- What It Is: Under the Tax Cuts and Jobs Act (TCJA), eligible real estate businesses can deduct up to 20% of their qualified business income.
- Who It Applies To: Real estate businesses structured as pass-through entities (e.g., sole proprietorships, partnerships, S corporations).
- Tax Implications: The deduction is subject to limitations based on income and may not apply to all real estate activities.
- What It Is: The profit from the sale of real estate is subject to capital gains tax, with different rates depending on how long the property was held.
- Who It Applies To: Property owners selling real estate.
- Tax Implications: Short-term capital gains (property held for one year or less) are taxed at ordinary income rates, while long-term gains (property held for more than one year) are taxed at lower rates. The exclusion of up to $250,000 ($500,000 for married couples) is available on the sale of a primary residence.
- What It Is: Costs for ordinary repairs and maintenance that keep property in good condition are fully deductible in the year they are incurred.
- Who It Applies To: Owners of rental properties and commercial real estate.
- Tax Implications: Deducting these expenses reduces taxable income. However, improvements that add value or extend the property's life must be capitalized and depreciated.
- What It Is: Property taxes paid to local governments are deductible as an expense for rental properties.
- Who It Applies To: Real estate owners and landlords.
- Tax Implications: Deducting property taxes reduces taxable income from rental activities.
- What It Is: Losses from rental properties can offset other income, but the ability to deduct losses is subject to the passive activity loss rules and the taxpayer's adjusted gross income (AGI).
- Who It Applies To: Landlords and real estate investors.
- Tax Implications: Losses are fully deductible against other income if AGI is $100,000 or less. The deduction phases out between $100,000 and $150,000 AGI.
- What It Is: Real estate professionals and landlords who use part of their home exclusively for business purposes may qualify for a home office deduction.
- Who It Applies To: Real estate professionals and landlords who use a home office for managing rental properties.
- Tax Implications: The deduction is based on the percentage of the home used for business purposes and can include a portion of mortgage interest, utilities, and insurance.
- What It Is: REITs are companies that own, operate, or finance income-producing real estate and offer certain tax advantages.
- Who It Applies To: Investors in REITs.
- Tax Implications: REITs must distribute at least 90% of their taxable income to shareholders as dividends, which are generally taxed at ordinary income rates, although some may qualify for the QBI deduction.
- What It Is: Improvements made to rental property by tenants or landlords must be capitalized and depreciated over the appropriate life of the improvement.
- Who It Applies To: Landlords and tenants making improvements to leased property.
- Tax Implications: Depreciation reduces taxable income over time, but leasehold improvements generally cannot be expensed in the year they are made.
- What It Is: Real estate owners must comply with various state and local tax regulations, including transfer taxes, recording fees, and local income taxes.
- Who It Applies To: Property owners, landlords, and real estate investors operating in multiple states or localities.
- Tax Implications: Compliance with state and local tax laws is critical to avoid penalties and ensure accurate tax reporting.
- What It Is: Various federal and state programs offer tax credits for making energy-efficient improvements to real estate.
- Who It Applies To: Property owners investing in energy-efficient upgrades.
- Tax Implications: These credits can reduce tax liability and encourage investment in sustainable property improvements.
- What It Is: An installment sale allows the seller to spread out the capital gains tax liability over several years as payments are received.
- Who It Applies To: Real estate sellers who receive payments over time rather than in a lump sum.
- Tax Implications: The gain is reported and taxed proportionally as payments are received, which can provide tax deferral and reduce immediate tax liability.
State Tax Implications for Texas
Texas State Franchise Tax
If you are an LLC registered in Texas you will need to file a franchise tax return for years 2023 and prior.
New Filing Requirements for 2024
The no tax due threshold is increased to $2.47 million and certain filing requirements are eliminated.
Taxpayers Under the No Tax Due Threshold
For reports originally due on or after Jan. 1, 2024, a taxable entity whose annualize total revenue is less than or equal to $2.47 million is not longer required to file a No Tax Due Report. However, the entity is still required to file the Public Information Report or Ownership Information Report.
Specific to Nonprofits you can apply for exemption status and not have to file annually. We can help with that.
REINSTATING OR TERMINATING A BUSINESS
Both Texas-formed and out of state entities registered with the Texas Secretary of State (SOS) must satisfy all state tax filing requirements before they can reinstate, terminate, merge or convert a business. Note the filing due dates to avoid late penalties.
We can help with all of this.
If you are an LLC registered in Texas you will need to file a franchise tax return for years 2023 and prior.
New Filing Requirements for 2024
The no tax due threshold is increased to $2.47 million and certain filing requirements are eliminated.
Taxpayers Under the No Tax Due Threshold
For reports originally due on or after Jan. 1, 2024, a taxable entity whose annualize total revenue is less than or equal to $2.47 million is not longer required to file a No Tax Due Report. However, the entity is still required to file the Public Information Report or Ownership Information Report.
Specific to Nonprofits you can apply for exemption status and not have to file annually. We can help with that.
REINSTATING OR TERMINATING A BUSINESS
Both Texas-formed and out of state entities registered with the Texas Secretary of State (SOS) must satisfy all state tax filing requirements before they can reinstate, terminate, merge or convert a business. Note the filing due dates to avoid late penalties.
We can help with all of this.
Get started on your required Beneficial Ownership Information Report
(BOI Report to FinCEN)
As part of the Corporate Transparency Act, a new federal mandate requires that businesses file a Beneficial Ownership Information Report to avoid criminal and civil penalties. We can help you to file in a compliant and stress-free way. Most reporting fees are 100.00.
Why do you need to file?
In 2021, Congress passed the Corporate Transparency Act on a bipartisan basis. This law creates a new beneficial ownership information (BOI) reporting requirement as part of the US government’s efforts to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other opaque ownership structures.
Who needs to file?
All domestic and foreign entities that have filed formation or registration documents with a US state, unless they meet one of 23 enumerated exceptions, including:
EXEMPT: Large operating entities that meet all the following criteria:
When to file?
(BOI Report to FinCEN)
As part of the Corporate Transparency Act, a new federal mandate requires that businesses file a Beneficial Ownership Information Report to avoid criminal and civil penalties. We can help you to file in a compliant and stress-free way. Most reporting fees are 100.00.
Why do you need to file?
In 2021, Congress passed the Corporate Transparency Act on a bipartisan basis. This law creates a new beneficial ownership information (BOI) reporting requirement as part of the US government’s efforts to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other opaque ownership structures.
Who needs to file?
All domestic and foreign entities that have filed formation or registration documents with a US state, unless they meet one of 23 enumerated exceptions, including:
EXEMPT: Large operating entities that meet all the following criteria:
- Employee more than 20 people in the US
- Had gross revenue (or sales) over $5 million on the prior year’s tax return
- Has a physical office in the US
When to file?
- A company registered business before January 1, 2024 has until January 1, 2025 to file its initial BOI Report.
- A company created or registered in 2024 will have 90 calendar days to file after registration is effective.
- A company created or registered on or after January 1, 2025, will have 30 calendar days after registration is effective.
- Civil penalties are up to $500 per day that a violation continues.
- Criminal penalties include a $10,000 fine and /or up to two years of imprisonment.