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Real Estate News and More Frequently Asked Questions

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.

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

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