August 27, 2020

Is tax on rental income in Florida impacting my returns?

Many clever investors that want to buy tangible assets to either balance the risk of their investment portfolio or just because they love the amazing features that Florida has and want to own a holiday and vacation property in this amazing location. As we know, there are plenty of reasons why people invest here. Not only does Central Florida and especially the Orlando area have a low base price for properties in comparison, it also has fantastic tax incentives for investors. Properties here have been appreciating by 4-5% consistently over the last 5 years, the city is growing and big corporations like Disney and the likes keep investing into new land acquisitions. Apart from these economical arguments, Florida itself is mesmerizing, superb climate makes it a year-round demanded location for tourists. Endless beaches, welcoming locals and an international atmosphere make Florida appealing to guests from around the world. As a non-resident foreign owner you can choose to spend up to 6 month a year in the US, either using your investment property as a vacation destination yourself, or you can choose to rent out your property for the entire year. We often get the question of how much the final tax bill of the property LLC will be like.

The short answer from our account team is:

“It is recommended to set aside 10% of your net ROI for paying any income tax that occurred during the financial year of the LLC.”

We speak with our clients throughout the year and help to optimize the returns and payable tax bills and found that in the majority of cases, the actual tax bill is 0%.

Why is that?

As long as you rent out your property for more than 15 days in a year, most of your expenses from maintaining the investment can be offset against your tax liability from rental income. What are those favorable tax breaks?

When a tax year ends, our accountants get busy calculating the tax rate that you have to pay for the income you earned throughout the year. If you followed the recommended structure of opening a property LLC which owns your property, you are running a business in the US. Therefore, you are obliged to pay business tax.

Our accountants advise you, to set a budget of about 10% of your net rental income so that you can pay the annual tax bill at the end of the financial year of your property business. In the majority of cases, the actual tax payable is much lower than the budgeted 10%. In many cases, its 0%.

How can that be?

International property investors will be excited to learn about the generous tax deductible expenses of your rental income.

FloridaRealtors’ website sums up these tax deductible allowances on their website. We have categorized them into different buckets:

The property:

  • Structural improvements; if you work on topics like roofing for your investment property and don’t pay cash but instead finance the cost, you can deduct the interest from your tax bill. If the project qualifies, you might be able to classify it as “home improvement deduction”.
  • Utilities;  if you are renting out your property, you will have costs for air conditioning, heating, water and electricity, which you are able to deduct from your tax
  • Cleaning, gardening and maintenance; no matter if you decide to clean your property on your own or hire a service company for maintenance of the inside or outside of your property, you may deduct these expenses

The rental business:

  • Rentals services and advertising fees; listing your property on rental platforms like AirBnB and HomeAway is not for free, these cost, together with any other advertising costs is tax-deductible,
  • Furniture, linens and food; any new furniture or household items like linens or even food or drinks which you provide for your guests can be claimed as tax deduction
  • Repairs and painting; broken windows, re-painting or any other repair works are tax deductible

The Financials

  • Mortgage interest; the IRS (US tax office) allows investors to claim mortgage interest against the rental income that the property generates
  • Property taxes; you can deduct your property taxes as rental expenses or as personal expenses on Schedule A
  • Property insurance; if you decide to have your property insured and pay extra because you are renting it out, you may deduct these additional costs as a business expense from your tax bill
  • Municipality services; expenses paid to the local government like trash removal are tax-deductible

If you would like to have a more in depth conversation with one of our specialists on how much tax you will have to pay for your property, please don't hesitate to reach out to us today.

About the author
Xavier Salcedo
Xavier is 45 years old, Mexican, married for +12 years and father of two beautiful children. He is passionate about traveling, cooking, a good glass of wine and spending time with his family and friends. As a Mexican who studied Business Tourism and majored in sales, his passion for Hospitality goes way beyond and he loves transmitting that and deliver the best possible experience to its customers. He has worked for some of the most important companies in the world where the customer is the center of it all and that is the case for Black Tile Investment. He has completed +39 projects already, raising +$22 MM USD. Along helping our investors to get the best property, he is in charge of running the property management either online and on site and deliver the best experience ever either to investors and their guests.
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