Benefits of Being A Landlord
The first few years of encompassing your landlord duties are generally the hardest. Some landlords say it takes five to seven years for a rental property to create a healthy cash flow.
Renting properties can be a risky business, but generally it’s much more stable than the erratic stock market. Buying properties to derive income from them is basically a passive activity so it is understandable that in most cases the income is treated as investment income.
However, investors are often aware that when rents are taxed as business income there are some potential tax advantages. What are those advantages and how are they obtainable?
Extended Constitution for Expense Deductions
When engaged in passive lettings, each property must be treated separately. All expenses directly complement to the letting of a property and are eligible for deduction from the rents of that property but this leaves little or none for deducting expenses of a more general nature.
Coherently, when rents are treated as business earnings, all eligible properties are treated as part of one single source of income, the ‘business’ of renting.
As such, expenses such as travel cost to and fro between the properties and other management and administration expenses can often be allowed as a deduction because they are incurred for ‘the business’.
When the owner is a company, this can also apply to reasonable sums paid out as directors’ fees.
Deductions due to Asset Depreciation
As a source of income under the term ‘business’, deductions can be claimed for capital allowances at the cost of eligible assets used for the purposes of the business.
This applies to furnishings and renovations used generally in connection with maintenance or management of properties.
The rates at which capital expenditure can be written off differ according to the nature of the assets but, in many cases, the allowances are provided at accelerated rates permitting a full write-off over a very short period.
The method used for passive lettings allows the cost of an asset bought to replace an existing one to be deducted from the rent but without giving any deduction for the cost of the original one (the “renewals basis”).
Tax Relief of Losses
There is never a predetermined intention to suffer losses but when a business does incur a loss, it is useful to have a contingency plan for it.
Although the business of renting may produce a tax loss, it is more usual for the person concerned, whether an individual or a company, to be seeking relief for a loss sustained in other business ventures.
There are several ways in which this can be done accomplished. A current year loss can be offset against current year income but also a business loss sustained in an earlier year can be offset against the current income from a different business, such as the business of renting.