Income property refers to income earned by reason of possessing property. The three major categories of income property are rent from rental of property, acquired by the possession of natural resources; interest on savings accounts; and rent, obtained by the possession of real estate. Each of these three categories of income property has its own set of tax advantages and disadvantages.
Rent is one category that provides many tax advantages because real estate is considered a depreciated asset and therefore, there is no need for it to be depreciated over time. This is because the actual value of the real estate is lower than the initial purchase price. Therefore, there is no need to pay tax on the actual purchase price of the real estate.
Interest on savings accounts is another category of income property. Interest on savings accounts can be tax deductible as long as there is no investment in the account that can be used to produce the interest. If the account is a Roth IRA account, the interest on savings can be fully taxed if it is withdrawn before the retirement age. This is because the account is considered to be an account that produces income. However, if the account is a traditional IRA account, the interest on savings can be tax deductible up to a certain amount, depending on the terms of the account.
Rent received through the ownership of real estate can also be tax deductible, provided that the owner does not withhold any tax from the rent payments. The only exception to this rule is if the rent is exempt from federal income tax. A deduction is also possible for income taxes paid on the property and on interest, although this is dependent upon the specific agreement between the owner and the landlord. Any rental income obtained from such an agreement can be included in the taxable income of the owner.
Interest earned on financial accounts that are not owned is considered income property because it produces income. However, interest earned on financial accounts that are owned can be deducted as an expense or as a benefit on a tax return. In general, expenses incurred for educational purposes can be deducted as an expense, but interest paid to a bank as a loan cannot be deducted.
Real estate, unlike the other categories mentioned above, is subject to depreciation. The value of a home depreciates over time. This depreciation can be accelerated by the sale or exchange of the property for another piece of property. Because real estate is depreciating assets, it is also subject to an increase in basis. This increase in basis can be taken into consideration in determining the cost of property.
There are some tax advantages that are applicable to the use of real estate. For instance, if a home is being held as security against a loan, the interest on the loan is deductible. Interest on a mortgage loan is tax deductible.
When using the tax advantages available for income property, there are some things that should be considered. However, these advantages are generally based on the specific type of property and their current use.
Interest on a loan used for education can be tax deductible. However, interest on a credit card used for vacationing can also be deducted. If an item is being held in lieu of property that would be required to be transferred, the item can be deducted. An item held in place of an asset that can be transferred to another person can also be deducted.
The value of land used to raise cattle or horses can be used to deduct the income from such a property. Similarly, if the income of the livestock being raised is more than the value of the land, the income can be deducted. Interest on a lease or a mortgage loan used to raise animals can also be deducted. Interest on an inherited property used to earn money can also be used to reduce income.
Real estate also has tax advantages, because it is not subject to all forms of federal income taxation. For example, state income tax is normally exempt. State income tax can also be avoided through estate tax.
Federal tax may be avoided through mortgage interest or estate tax. Although property taxes may not be reduced, the property taxes paid may still be deducted. This is true if the property is used for business or if it is used to earn money.