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Find out about the tax implications of buying investments, whether rental property or a partnership in an S Corporation.
What are the tax implications of buying an investment?
Here’s what you need to know:
Bought Rental Property
As a landlord, you will have income and expenses. Rental income includes payments received from a tenant for the use of property, payments to cancel a lease, advance rent, and any non-refundable security deposit used as a final payment of rent. Expenses such as cleaning, legal fees, management company fees, repairs, and advertising are deductible. The cost of the home and improvements made to the property may not be claimed in full the year the house becomes a rental property, or the improvements were made. Instead, you must deduct a pre-determined percentage of the cost each year, which is called “depreciation.”
If you invested in securities or other financial products, you will receive a Form 1099-INT or Form 1099-DIV, and if it shows you paid foreign taxes, you may be eligible to claim either a credit or an itemized deduction for these taxes. Generally, the foreign tax credit results in greater tax savings than deducting the foreign taxes as an itemized deduction.
Bought an Interest in a Partnership or S Corporation
If you have invested in a small business, you are not eligible to deduct your costs, however, you can reduce your potential profit when you sell by subtracting your cost basis, which is the amount invested (your purchase price) plus any additional investments made while you owned part of the business, from the sale price of your investment. Additional investments may include cash contributions, non-cash contributions, and your share of non-dispersed income.