Tax
Advantages on Rental Real Estate
Favorable income tax rules are a major
reason why so many people now have invested
in rental properties. You can reinvest the
full amount of the sheltered cash flow,
which means a higher return for you.
As you may already know, you can deduct
mortgage interest and real estate taxes
on a rental property. However, if you pay
mortgage points, you must amortize them
over the term of the loan. Unlike points
on a principal residence, which can generally
be deducted immediately.
You can also write off all the various
operating expenses like utilities, insurance,
homeowner association fees, repairs and
maintenances, yard care, etc.
Probably the biggest tax-savings write-off
is depreciation. You can depreciate a residential
building over 27.5 years, even while it
is increasing substantially in value.
Let's say you buy a rental property for
$135,000. The price allocable to the building,
not the land, is $100,000. You can depreciate
the $100,000. Over 27.5 years. Your annual
depreciation write off would be about $3,600.
This means you can have that much positive
cash flow each year without owing any income
taxes. If you own several properties, you
can readily see that you can shelter a significant
amount of cash flow with your depreciation
deductions.
Eventually your rental properties should
start generating positive taxable income
instead of losses. Of course you must pay
income taxes on those profits. But if you
piled up some carryover passives losses
in earlier years, you now get to use them
to offset your profits. So, you may not
actually owe any taxes for quite a while.
More good news is that positive taxable
income from rental property is not hit with
self employment tax, which applies to most
other profit making ventures other than
working as an employee and investing.
There are many homes on the market right
now that would make great rental opportunities.
Check with your accountant to see if this
is a good investment plan for you. If so,
Call Me and let's start looking Today. 586.294.5055
