When you buy and sell investment properties, you have to report the income you earn on your tax return, but you also get to deduct your expenses. Wondering how to account for a property investment loan on your tax return? Here is what you need to know.
1. The Loan Is Not Business Income
When you receive a loan, it feels like revenue. After all, this is the money you use to make your investments possible. However, you should not report the loan as revenue.
Instead, the money you receive for selling your investment property is effectively your business revenue. You will report those amounts as capital gains as explained below.
2. The Loan Payments Are Not Business Expenses
Every month you pay your investment loan. So, you should note these payments as expenses in your bookkeeping records, right? Actually, that is wrong.
You don't report your monthly loan payments anywhere on your tax return. You should track these payments for your personal records. They can help you get a sense of your monthly cash flows.
But you should never classify these payments as business expenses. Again, the loan is not revenue, and the payments are not expenses.
3. You Need to Report Capital Gains
As indicated above, when you buy and sell an investment property, you need to report your capital gains.
Your capital gains are the difference between the sales prices and the price you paid for the property. For instance, if you bought an investment property for $150,000 and sold it for $250,000, you have $100,000 in capital gains.
You also get to deduct capital expenses from this amount. For example, if you spent $20,000 on a new roof, your capital gains are reduced by that amount.
4. You May Need to Depreciate the Property on Your Tax Return
When you're flipping properties, you typically try to get rid of them within a few months. But if you're in a situation where you have an investment property for more than a year, you will need to depreciate it on your tax return.
Depreciation is when you claim a small amount of the asset's value as a business deduction every year. With investment property, you usually depreciate it every year for over 27.5 years. That means you claim about 3.63% of the property's purchase price as a depreciation expense every year.
5. Loan Interest and Fees Are Deductible
The interest and fees you incur on your investment property loans are deductible. You should deduct these amounts from your investment income. Don't forget to track these amounts. They may seem small compared to the overall value of the loan, but they will help to reduce your tax liability.
For more information about investment property loans, contact a lender in your area.