House hacking is an excellent strategy to build wealth and reduce living expenses, especially here in Wisconsin. But did you know that house hacking also comes with significant tax benefits? Understanding these benefits can help you maximize your savings and make the most out of your investment, although you should always consult with your tax advisor on all the below suggestions as we do not offer tax advice.
1. Mortgage Interest Deduction
One of the biggest perks of house hacking is the ability to deduct mortgage interest. If you live in one part of your property and rent out the other units, you can deduct the interest on the mortgage related to your primary residence. Additionally, you can also deduct the interest portion related to the rental units as a rental expense. This dual deduction can significantly reduce your taxable income.
2. Depreciation
Depreciation is a powerful tool that allows you to recover the cost of your investment property over time. For the rental portion of your house hack, you can depreciate the value of the building (not the land) over 27.5 years. This annual depreciation expense can be deducted from your rental income, reducing your overall tax liability. Just make sure to keep detailed records of your property’s purchase price and allocate the appropriate amount to the building versus the land.
3. Operating Expenses
As a landlord, you can deduct various operating expenses related to the rental portion of your property. These expenses can include repairs, maintenance, property management fees, insurance, utilities, and even a portion of your internet and phone bills if they are used for rental purposes. By tracking and deducting these expenses, you can further reduce your taxable rental income.
4. Home Office Deduction
If you manage your rental property from a home office, you may be eligible for the home office deduction. This allows you to deduct a portion of your home’s expenses, such as mortgage interest, utilities, and insurance, based on the square footage of your office relative to your entire home. Just ensure that your home office meets the IRS requirements of being used regularly and exclusively for your rental business.
5. Travel Expenses
Travel expenses related to managing your rental property can also be deductible. This includes mileage for driving to and from your property for maintenance or tenant meetings, as well as any travel expenses incurred for property-related business trips. Keep a detailed log of your travel expenses to substantiate your deductions.
6. Pass-Through Tax Deduction
The Tax Cuts and Jobs Act introduced a new tax benefit called the Qualified Business Income (QBI) deduction, which allows eligible landlords to deduct up to 20% of their rental income. To qualify, your rental activity must be considered a trade or business, which generally means you are actively involved in managing the property. This deduction can provide significant tax savings for house hackers.
7. Capital Gains Exclusion
If you live in your house hack for at least two out of the five years before selling, you may qualify for the capital gains exclusion. This allows you to exclude up to $250,000 (or $500,000 for married couples) of capital gains from the sale of your primary residence. This benefit can apply to the portion of the property you lived in, potentially reducing your taxable gain when you decide to sell.
8. Professional Advice
Navigating the tax benefits of house hacking can be complex, and it’s crucial to stay compliant with IRS regulations. Consider working with a tax professional who specializes in real estate to ensure you’re maximizing your deductions while adhering to tax laws. They can provide personalized advice based on your unique situation and help you develop a tax strategy that aligns with your financial goals.
Ready to Start Your House Hacking Journey?
House hacking offers incredible financial advantages, and understanding the tax benefits can make it even more rewarding. If you’re ready to start your house hacking journey in Wisconsin, House Hacking Wisconsin is here to help. Our team of experts can guide you through the process, from finding the perfect property to leveraging all available tax benefits. Contact us today to learn more and take the first step towards financial freedom! Text or Call US! (608) 975-3330.