Real Estate Income and Capital Gains

Anyone who invests in real estate actively or passively may find their income or profits subject to government taxes. Your investment portfolio could be taxed in two different ways: as personal income or as capital gains from a sale. 

Rental Income & Deductions

For properties that are being leased by tenants, the money you receive as rent must be declared as ordinary income on your tax return. Rental income is everything earned minus deductible expenses.

The only items that can be deducted are mortgage interest and repairs which restore the property to its original minimally functional condition. Repairs and maintenance expenditures can be deducted the year you spend the money. 

More extensive repairs such as new landscaping, installing energy-efficient windows and doors, renovations and additions are considered capital investments. Usually, these also allow you to increase the rent. 

Capital Gains on Home Selling or Home Flipping 

Projects that are earned through income property or investment properties are subject to capital gain taxes. The tax liability will be determined by federal requirements and the length of time that you have owned the property. Flipping a property in less than a year will subject you to a short-term capital gain, which is the same rate as your marginal income tax rate. For properties being sold after one year of ownership may quality for less tax liability with a tax on profits that range from 1-15%. It may be wise to consider adjusting the timing of your home sale to minimize exposure to the net investment tax. 

To calculate your capital gains (or loss) in your portfolio, subtract any sales costs, the original price, and the cost of improvements from the sale price. Then account for depreciation you claimed on the property.