TAX BENEFITS OF OWNING RENTAL PROPERTY

The tax benefits of buying a home versus renting |Patchogue|Medford|Homes for sale|LI Real Estate| www.ErwinGiron.com by ErwinGironTax Benefits Of Owning Rental Property.  Rental property deductions are too significant to ignore.  They are both numerous and substantial.

Bottom line, when it comes to federal tax deductions, “Residential Investment Property” provides a significant tax shelter.  This is evident if you own one or many rental properties.

You’ll achieve the largest tax savings as a real estate investor; not a small business. Real estate used as a small business includes realtors, builders, contractors and people that buy property to flip (sell quickly).  This type of activity is not considered investing.

However, real estate investors buy property as long-term investments, which is greater than 1 year’s time, to rent out to tenants.

By treating the property as a small business instead of an investment, you’ll lose out on a substantial tax deduction called depreciation.  Depreciation can be taken as a deduction to compensate the investor for the property as it ages as well as theoretical wear and tear.

You’ll find that another great benefit to investing in a rental property is, in many cases, you can show a rental loss on paper, even though you made money on the rental. It gets better. If you work a W2 job, you can reduce your W2 taxable income substantially with your rental property deductions.

Tax Benefits Of Rental Property:
You will take your rental property tax deductions on IRS Schedule E. This schedule is where you’ll indicate your investment property income and expenses. There are several expenses that can be taken as deductions, including “other” expenses (line item 18).

Here is a summary checklist of rental property tax deductions that you can take advantage of as an investor (be sure to check with your tax accountant for a comprehensive list, and what applies to your specific situation):

• Advertising
This would include any form of advertising to get a tenant into your rental property. This includes signs, flyers, ads and business cards.

• Auto
You can deduct any mileage you drove to maintain and manage your property. For instance, you drive from your home based office (which you can set up as a landlord) to your rental property. You would be able to claim this mileage as an expense on your Schedule E.

You may notice the key words being “maintain and manage” your property. This means if you need to drive out to the property to check on how a repair is coming along, you can write off this mileage.

If you drive to your rental home to speak with your tenant about anything regarding the home or to collect rent, this is deductible mileage.

Managing your property can also include doing a drive by to look at the property to ensure it’s in good standing. Just make sure you keep good mileage records including the purpose of the trip.

If you live out of state, then you might be able to deduct travel to and from the state of the rental property.

• Depreciation
Your residential rental property gets depreciated over 27.5 years. For example, if you pay $1,000,000 for the home, you can take a depreciation tax write-off of $36,360 ($1,000,000/27.5 yrs) per year, which is taken as a “paper loss” against any gross income you make. This is a substantial tax deduction.

• Cleaning & Maintenance

• Homeowners insurance

• Mortgage Interest

• Property taxes

• Utilities (if you pay them instead of the tenant)

• Phone costs, PO Box, internet costs related to your rental property

• Repairs & Supplies

• Educational Expenses
For example, you can deduct any books or courses you buy that have anything to do with rental properties

• Real estate club dues

• Tenant credit report fees

• Professional fees
This includes legal, accounting, and realtor fees

• Management Fees
If you pay a property management company to manage your rental property for you, you can deduct these management fees.

• Homeowners association fees

You should always consult a good tax accountant when thinking of investing in real estate.

“Residential Investment Property” is one of the best remaining tax shelters available.

For those of you who would like more information, please contact me.

As I always say:

“The pessimist complains about the wind.
The optimist expects the wind to change.
The leader adjusts the sails.”
– John Maxwell

&

No Matter WHAT:
“Happiness is a CHOICE

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21 Responses to “TAX BENEFITS OF OWNING RENTAL PROPERTY”

  1. Carley L. McNeilly Says:

    I am interested in selling my home but i am quite busy with business. Please any body tells about short sale, i am not exactly
    getting it.

  2. gnashes30@yahoo.com Says:

    I’ve been researching the deductions for my 2012 taxes, nice info, thx for posting. Here’s another link for your future visitors to see the actual tax deductions in dollar amounts

    http://www.random75.com/rental-properties/real-estate-investing/tax-benefits-rental-properties

  3. reggie Says:

    Thanks for all the tax info regarding rental properties. They can have substantial tax saving benefits which are well laid out here.

  4. Will Holley Says:

    Hi
    I was wondering if it would still be considered an investment property if a family member were to purchase a home in NC for me, but I am to pay as if i purchased it myself, and they live in Va. I am wanting them to get all the possible tax breaks since they are self employed.
    Thank you for any info or suggestions

    • Mel Kaye Says:

      Hi Will,

      For accurate information you should always consult a tax professional. I am not a tax professional. Having said that, as long as you and the owner of the property have executed a proper rental agreement there is no reason that the owner, family member or not, cannot claim the property as an investment property and get whatever tax benefits are allowed in NC.

      Again, you should consult a tax professional.

      Regards,
      Mel

  5. Shruti Says:

    Hi Mel,

    My husband and I just finished paying a mortgage on a investment property in India. Our next step would be to buy a home here. Given that we live in the Bay Area costs of homes start at 500k. My husband and I are contemplating between three options.
    1) Buy a home in the Bay Area for 500k-600k and lock in the low mortgage rates and save on taxes by making it our main residential property.
    2) Buy a couple of homes for 150k each in places like Sacramento and hire property managers to look after it after giving it out on rent still locking in the low mortgage rates. The idea is to pay these properties off in 4-5 years (it took me 3 years to pay back a 100k mortgage in India) . If we go for this option we will not be able to buy a residential property for our living for at least 5-6 years.
    3) Buy a cheaper place in the bay area for 300k as a residential property and buy another
    in Sacramento for 100-150k that would be given out on rent.
    I would really appreciate your views on the two options as well as your recommendations on which on to go for.
    The idea is to maximize the tax breaks as well as take advantage of the historically low interest rates. Personally, I would like to start generating passive income long term after buying more homes in Sacramento for 100-150k.

    Thanks!
    Shruti

    • Mel Kaye Says:

      Hi Shruti,

      You have presented three interesting options…..all with their own merits.

      My views would depend on your goals and desires……are you interested in a quality of home life, or to defer that in deference to income generation? Your three options directly bare on your three goals: 1) income production, 2) quality of home life, 3) compromise.

      You have to decide which one of these three is in line with the shared goals of you and your husband. I, like you, feel that Sacramento is pretty good place to invest.

      You need to take into account other sources of income that you and your husband have access to.

      My advise is to fully understand your goals, as a couple, and put together a detailed pro/con work sheet with a value kicker. In other words list all options with a 1-10 value, based on your goals.

      I would be curious as to what you decide.

      Please let me know if I can be of any further assistance.

      Regards,

      Mel

  6. Steve Says:

    Excellent article Mel!
    We bought a residential investment property from the builder this year ($500K) and had to put down 10% ($50K) the property will be completed in about 1.5 years. The balance ($450K) will be financed. Is the $50K down payment deductible and how, and are we allowed to depreciate the cost of the property $500K over 27.5 years and deduct $18,181 from our income as a “paper loss” this year? Is that how it might work or would we have to wait until construction is complete before we can take advantage of any deductions (down payment + depreciation)?

  7. Randy Smith Says:

    Well, should I fire my accountant? I purchased 4 properties in 2011, spent just over $40,000.00 in getting them renovated and ready to be rented. Was able to rent all three for the last 6-7 months left in the year. My total income was $23,000.00 from rental properties. I also made $258,000.00 from another job. My accountant says that I cannot take any of the losses, deductions, or depreciation from these properties, because of income exceeded $150,000.00 in 2011!! Is this true?

    • Mel Kaye Says:

      I would seek out a second opinion from another tax accountant……one who specializes in real property. As stated in my post, I am not a tax accountant. I am only giving you the possible tax benefits of owning real property. Also, the rules may differ from state to state.

    • Bryan Says:

      Randy — I have had the same thing happen. You got caught by the passive loss rule as you were phased out of active deductions. The losses accrue and you can take them later when the property sells. I am not a CPA but I stayed at a Holiday Inn Express last night.

  8. Calumet Office Says:

    Can I create a rental company, buy a property, and then lease it myself from the company?

  9. miami beach apartments Says:

    This article have helped me to realize more information regarding the real estate issues while investing the money on property.

  10. Jonathan Says:

    Question:

    We are trying to sell our house but we can’t. Plus we will have to sale lower that what we owe. What are the advantages of renting in Tucson AZ.

    • Mel Kaye Says:

      It seems to me that you have two choices:
      1) Rent and use the property as an investment property with the tax advantages that come with it.
      2) Try for a short sale (Take a look at my Short Sale Posts http://melkaye.wordpress.com/real-estate-index/short-sale-resource-help/

      I strongly suggest that you talk to a local Realtor that can go over all of the options. If you would like, I can recommend one that is quite knowledgeable in both Short Sales and investment properties. There would be NO obligation on your part.

  11. Vince Says:

    Great article. Quick question, what if you do not have any income the first year on your rental propert, can you still take the depreciation (assuming rental purchase was $220,000/27.5) $8000.00 of your W2 earnings?

    • Mel Kaye Says:

      Yes you can take depreciation from your rental property off of your regular income. For the exact amounts that are allowed, you will need to talk to a tax accountant.

  12. SHOULD I SELL OR RENT OUT MY HOUSE? « Mel Kaye & Associates: the RESIDENTIAL INVESTMENT PROPERTY resource Says:

    […] transportation expenses incurred for the maintenance of the property and collection of rent (Click HERE for […]

  13. Now Is The Time! « the Residential Investment Property resource Says:

    […] Investment Property.”  Depending on the situation, you can either, rent it out (with some rather amazing tax benefits) and then sell it when the market stabilizes, or turn it over with a little fix […]


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