House hacking is often one of the first strategies that many new real estate investors use because it’s a simple way to live for free while your renters cover your mortgage payments. House hacking involves buying a single-family or multifamily property and renting out the units or rooms you aren’t occupying.
If you are considering dipping your toes into real estate investing with this strategy, it’s important to consider the tax implications so you will know how much profit to report. Underreporting rental income on your taxes could cause problems for you later if you are audited.
Basics of Real Estate Taxation
Before you invest in your first rental property, it’s important to understand the basics of real estate taxation so you can set aside enough money to cover your annual taxes.
It’s also important to keep in mind that tax laws change every year. Don’t assume that just because something is tax-deductible one year that it will be tax-deductible the next. Always review current IRS regulations to make sure you have current information.
Also, consult with a tax professional when you are preparing your taxes. A tax professional will ensure your taxes are filled out correctly. Although you will have to pay a fee for the service, it will free your time for other things. It may also save you money by ensuring that you take all the legal deductions you qualify for.
Another important thing to remember with house hacking taxes is that you may be taxed at the local, state, and federal levels. Different localities and states have different tax laws, which is why you must contact your local and state tax authorities to determine your tax obligation.
At the local and state level, you will most likely have to deal with property taxes. There are also several taxes you will have to deal with at the federal level, including a tax on income, a capital gains tax when you sell, and a depreciation recapture tax.
Another thing to keep in mind…