Key Tax Benefits for New Mexico Landlords
1. Mortgage Interest Deduction
If you finance your rental property, the interest paid on the mortgage is generally tax-deductible. This deduction can significantly reduce your taxable rental income. Keep in mind that the Tax Cuts and Jobs Act of 2017 reduced the maximum mortgage principal eligible for this deduction from $1 million to $750,000, and increased the standard deduction, leading many taxpayers to opt for the standard deduction instead of itemizing.
2. Depreciation
The IRS allows you to depreciate residential rental properties over 27.5 years, enabling you to deduct a portion of the property’s cost annually. This non-cash deduction can offset rental income, reducing your tax liability. Additionally, cost segregation studies can accelerate depreciation on certain components of the property, such as flooring and electrical systems, allowing for larger deductions in the earlier years of ownership. This strategy can lead to substantial tax savings, especially under current bonus depreciation rules.
3. Operating Expense Deductions
As a landlord, you can deduct various expenses related to managing and maintaining your rental property, including:
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Property taxes
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Insurance premiums
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Repairs and maintenance
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Utilities (if paid by you)
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Property management fees
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Advertising costs
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Travel expenses related to property management
These deductions can significantly reduce your taxable rental income.
4. Passive Activity Loss Rules
If your rental property operates at a loss, you may be able to deduct up to $25,000 of that loss against your non-passive income, such as wages or salaries, provided your modified adjusted gross income (MAGI) is $100,000 or less. This deduction phases out between $100,000 and $150,000 of MAGI.
New Mexico-Specific Tax Considerations
1. Gross Receipts Tax (GRT)
In New Mexico, rental income from residential properties may be subject to the state’s Gross Receipts Tax (GRT), which is similar to a sales tax. However, long-term residential rentals (leases longer than 30 days) are generally exempt from GRT. It’s essential to verify your obligations, especially if you’re renting out properties on a short-term basis.
2. Property Tax Rates
New Mexico boasts relatively low property tax rates compared to other states. The average effective property tax rate is approximately 0.87%, with variations depending on the county. For instance, Bernalillo County has a rate of 1.18%, while Harding County’s rate is as low as 0.33%. These lower rates can enhance the profitability of rental investments.
3. Property Tax Rebates and Exemptions
New Mexico offers property tax rebates for certain residents:
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Senior Citizens: Residents aged 65 or older with a modified gross income of $16,000 or less may qualify for a rebate up to $250.
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Low-Income Residents: In specific counties like Los Alamos, Santa Fe, and Doña Ana, residents with a modified gross income of $24,000 or less may be eligible for additional rebates.
Additionally, veterans may qualify for property tax exemptions. For example, a $4,000 exemption is available for eligible veterans, reducing the taxable value of their property.
Special Programs for Affordable Housing
If you’re interested in providing affordable housing, the Low-Income Housing Tax Credit (LIHTC) program offers federal tax credits to property owners who set aside units for low-income tenants. These credits can be claimed annually over a 10-year period, providing a substantial incentive for participating landlords.
Final Thoughts
Investing in rental properties in New Mexico can yield significant tax benefits, from deductions on mortgage interest and operating expenses to favorable state-specific programs. However, tax laws are complex and subject to change. It’s advisable to consult with a tax professional familiar with New Mexico’s regulations to ensure compliance and maximize your tax advantages.
Sources: Investopedia , Investopedia+1Business Insider+1Business Insider , co.mckinley.nm.usBernalillo County , National Low Income Housing Coalition+2TaxSlayer Support+2Taxation and Revenue New Mexico+2National Low Income Housing CoalitionTaxation and Revenue New Mexico+1TaxSlayer Support+1 , Steadily | Landlord Insurance , DoorLoop
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