Real Estate investment and Tax benefits

Real Estate investment and Tax benefits

There a lot of reasons to invest in real estate properties. You probably heard some people say words like leverage, stability, cash flow, capital gain etc. These are all good, solid reasons and we will discuss them later but the number one reason, in my opinion, to invest in real estate is the TAX benefits.

Taxes are the single largest expense you have and will ever have during your life time. Saving money by driving less, buying at wal-mart, clipping coupons are all nice ways to reduce your monthly bills but it doesn’t change your net income. Reducing taxes will change your bottom line, it will make you NET income bigger.

How is real estate investment help with reducing taxes?

When you invest in real estate properties you get a few tax reliefs:

• Depreciation
• Equity
• Deductible Expenses
• Tax Credit

Depreciation!

As a policy the government is encouraging people to own real estate. One of the incentives the government gave the investors is depreciation.

Even though real estate properties usually go UP in value over time the government allows you to report a “loss” of value every year through the property lifetime. A residential property for example has a “lifetime” of 27.5 years. So if your investment property was purchased for $275,000 then each year you are allowed to report a “loss” of $10,000 this will reduce your TAXABLE amount by $10,000 every year! So if you make $100,000 a year you will be taxed only for $90,000.

Depreciation is the investor’s hidden cash flow.

Equity!

The Real Estate market usually goes up over the time. True there are years where the market goes up and some that it goes down but if you look at any property over a period of 15-30 years you will see that the properties value went up in the majority of the cases.

Over time your property value goes up and your loan gets smaller affecting the ratio between the property value to the loan so you can re-finance and pull equity from your property.

This equity you pull out of your property is TAX FREE!!! It’s tax free since it’s not an income it’s a loan.

When you buy stocks you have to sell them in order to see the profit from the stock and then you have to pay tax on the profit. In real estate you pull the equity in a form of a loan and this money if tax free, plus you don’t have to sell the house!

Deductible Expenses!

When you invest in real estate you are running a business. Unlike other forms of investments real estate investment is real qualify as a business for expenses purposes. When you go looking for properties, you can deduct your related vehicle expenses. If you call a plumber or an electrician to fix something at the rental property it’s tax deductible against your rental income. There are many other things you can deduct against your income. Have a meeting with a certified CPA to determine what can be deducible for your specific circumstances.

Tax Credit!

The federal government give you tax CREDIT for doing some things that relate to real estate.

For example you can take the following percentage as credit:

• 10% for the rehabilitation of buildings placed in service before 1936
  
  
• 20% for the rehabilitation of certified historic structures

Another example is when you renovate an office you can tax credit if you make the property wheelchair accessible (i.e. adding a rump, expanding the doors etc).

See the IRS website for more details.

Disclaimer - All taxes information given in this article is general and may not apply in your circumstances. Please consult a certified CPA and/or a tax advisor to find out what tax advantages you can use under your own cretin circumstances.

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