Renting out real estate affects you at tax time, whether you host many travelers on your property throughout the year or have a long-term tenant in the home you once lived in. Luckily, owning rental property in North Carolina is easier on the wallet than the national average tax rates.
Let’s look into NC rental property taxes and how to lower yours.
What Counts as Rental Income?
Rental income is any money you receive from occupants renting space from you, including:
- Ordinary and/or advanced rent payments
- Expenses the tenant paid (Ex., They paid utility fees, and you deducted the amount from their rent.)
- Property or services exchanged in place of rent money
- Security deposits
- Lease cancellation fees
Who Determines Your Property Tax and How
Your County Commissioner sets the property tax in your county. The county assessor determines the value of your property, reevaluating its worth at least once every eight years for an updated fair market price. They include your land and all its existing structures in their determination.
Using fair market value (FMV) evaluation, the assessor compares your rental property to nearby similar ones. Their assessment may include any recent renovations that improve your property’s value and its rental income potential.
Why It’s Great to Own Property in NC
North Carolina’s average effective property tax rate is currently 0.70% for every $100 of assessed value. Individual counties set their own rates, but most of our state’s counties are refreshingly below the national average. (See all 100 of our county’s property tax rates here.)
As a comparison, the current national average effective property tax is closer to 0.99%. To compare the two amounts, let’s say your property (land + buildings) is worth $500,000. Then, your property tax in NC would be $3,500 versus the national average of $4,950, a difference of $1,450 a year.
Commercial property tax rates are typically higher than residential ones in every state. Still, North Carolina ranks relatively low on these tax rates, too. Being an NC resident gives you an automatic tax advantage due to the state’s lower-than-average rates.
Rentals and Tax Deductions
You can lower your NC rental property taxes through available tax deductions. However, learning about all the deductions and understanding how to take advantage of all that’s allowable by the IRS can be challenging. You might end up paying more than you have to.
Let’s look at a few deductions associated with your rental property as you manage and maintain it for others to live in.
Some deductible expenses include things like the costs of:
- Advertising
- Cleaning
- Condo fees
- Depreciation
- Equipment rental
- Homeowner association dues
- Insurance premiums
- Maintenance costs
- Mortgage interest
- Pest control
- Repairs
- Realtor commissions
- Property management services
- Property taxes
- Supplies
- Trash pickup
- Travel
- Utilities
- Yard maintenance
Property Tax Complexities
Owning rental property can present some complex issues. As with all things taxes, so much depends on how very detailed tax laws apply to your specific situation. See the following examples.
Your expenses can’t be extravagant–only what’s ordinary and necessary.
You may take advantage of some deductions while your property is vacant. However, you can’t claim an income loss from vacancies.
You can sometimes deduct the cost of travel. There are many nuances to this, though.
The property taxes on your rental can sometimes help lower your income tax.
You may depreciate your property. However, real estate depreciates slower than equipment or an automobile, and determining depreciable amounts is challenging.
Repairs and repair supplies require special attention for tax deductions. They must, in fact, be repairs and not remodeling projects that improve your property and increase its value.
You may balance capital gains from your rental property with capital losses in the stock market.
You and family may stay in your rental property. At a certain point, however, you lose your deductions if you’ve spent too much time there.
You can’t deduct all maintenance expenses, some (like the following) add value to your property. You may be able to gain tax credits, depreciate, or use them to decrease your expenses the year you sell your house. Still, you often cannot deduct the following from your taxable income:
- HVAC systems
- Insulation
- Landscaping
- New flooring
- New roofing
- Water heaters
- Security systems
- Storm windows
Records to Keep for Tax Season
It’s a good idea to have a Certified Public Accountant in Charlotte, NC help you make the most of available deductions. Keeping the right rental records will help your CPA better serve you all year long.
Keep the following short-term records throughout a tax year:
- Advertising fees, including listing fees
- Credit cards used on rental
- Mortgage interest
- Legal fees
- Repair receipts
- Rental payment receipts
- Utility payment receipts
Keep the following long-term records related to your rental business in a well-organized and easily-accessible rental file:
- Copies of tenant leasing agreements for all your rental units
- Insurance policies
- Legal paperwork like property inspections, fines, and court appearances
- Loan documents
- Previous years’ tax records
- Property permits
- Real estate investment papers, such as property titles or deeds
Complex Taxes Call for a Pro
The best way to successfully utilize North Carolina or Mecklenburg County property tax deductions is to use a property tax advisor in Charlotte, NC, who knows your area and tax laws well. They’ll help you maximize your deductions while preventing potentially costly mistakes with the IRS. With so many nuances to tax law and individual circumstances, a tax pro is the way to go.
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