With the April tax deadline looming ominously, many of us are scrambling for receipts and trying to think of new ways to reduce that gross taxable income. For investors, business owners and contractors, the concern about tax liabilities makes it a particularly stressful time of year.
Even for an employee expecting a refund, it’s always interesting to think of strategies for increasing deductions or offsetting other forms of income. The good news is that owning a rental property can be an extremely effective means of reducing that gross taxable income.
The standard operating expenses involved with owning a rental property can be used as a tax deduction, in addition to real estate taxes and mortgage interest. Costs that fall into the standard operating expenses category could include repairs and maintenance, insurance, and utilities, as well as local travel to and from the rental property.
For anyone who would like to frequent a destination with great beaches or a lively riverfront, such as Wilmington for example, owning a rental property could act as a ‘forced vacation.’ This is because expenses for hotels, meals and airfare can be deducted for investors who own rental property that is located far away from their local area.
Instead of the money simply vanishing, with nothing left to show except a few good memories, it could at least be used to offset gross taxable income. This could make owning a rental property a viable wealth-building strategy for investors who live far away, but expenses like these are closely scrutinized by the IRS.
One aspect of owning rental property that sets it apart is depreciation. No other form of investment offers this advantage! Depreciation allows a portion of the property’s value to be deducted off the investor’s gross annual income for 27.5 years. After understanding that a property that cost $200,000 would have an annual depreciation deduction in the amount of $7,273, it’s easy to see why some of our best and brightest choose to buy rental properties.
In the scenario described above, an investor could have up to $7,273 in positive cash flow coming in that would be entirely tax free. Of course, if multiple rental properties were in play the effects would be much more significant. However, since the value of land never goes away, it’s worthwhile to point out that it is only the cost of the structure that can be depreciated.
The fact that rental properties have the potential to appreciate in value creates a tremendous upside. Consider that an investor could be actively taking a deduction off his taxes, by accounting for his rental home’s loss in value over time (depreciation), while simultaneously witnessing the same rental property’s value rapidly increase. This is a nice double-whammy and certainly not outside the realm of possibility for a stable real estate market such as Wilmington.
Some of the other tax breaks that owning a rental property could provide include any fees that are paid for professional services, such as property management. The cost of paying for an
attorney or accountant to help with the management of a rental property could also be deducted.
attorney or accountant to help with the management of a rental property could also be deducted.
The tax breaks alone make the ownership of rental properties a key element of any successful investment strategy. This is not even taking the advantage of appreciation into account, which is part of why owning real estate is one of the most effective ways to build long-term wealth.
Of course, every article these days needs to end with a disclaimer, and this one is no different: any potential investor should have a consultation with a tax advisor before making a decision.
For qualified assistance with the management of an investment property, please call 910.859.7238 or visit www.UltimateRentalHomes.com.
