With the end of the year approaching, many of us are being distracted by visions of sugar plums and thoughts of the holidays. For investors, business owners and contractors, however, it’s a time of year when a concern about tax liabilities has the potential to cast a shadow over any holiday gathering.
Even for an employee anticipating a refund, it’s always interesting to think of strategies for reducing gross taxable income. The good news is that owning a rental property can be an extremely effective means of offsetting other forms of income.
In addition to mortgage interest and real estate taxes, the standard operating expenses associated with owning a rental property can be used as a tax deduction. These costs may include repairs and maintenance, insurance, utilities and property management, as well as local travel to and from the rental property.
Expenses for hotels, meals and airfare can even be deducted for investors who own rental property that is located far away from their local area. This could be a viable strategy for anyone who would like to consistently visit a destination with great beaches or a lively riverfront, for example, but expenses like these are closely scrutinized by the IRS.
Probably the biggest advantage to owning a rental property is depreciation. This allows the owner of a rental property to deduct a portion of the property value off their gross annual income for 27.5 years. Consider that the yearly depreciation deduction for a property that cost $200,000 would be $7,273, and it is easy to see why savvy investors choose rental properties.
No other form of investment offers the benefit of depreciation. In the example mentioned above, the investor could have a positive cash flow up to $7,273 and it would be tax free. With multiple rental properties in play, the effects become much more significant.
The advantage of depreciation is compounded by the fact that rental properties have the potential to appreciate in value. In a stable real estate market, or one that is rapidly improving such as Wilmington, this can create a tremendous upside. It’s worthwhile to note, however, that it’s only the cost of the actual, physical structure that can be depreciated, not the land, since the value of land never goes away.
There are many other tax advantages associated with rental property. Since repairs are deductible, any update that is being considered should be performed while the home is being used as a rental. Doing so will often result in A) higher rents and B) lower vacancy levels. Fees for professional services can also be a deduction. These can include fees paid to an attorney, licensed property manager or accountant for help with a rental property.
Aside from the potential of real estate to build wealth, which I wrote about in a previous article, the tax advantages alone make it worthwhile to consider purchasing a rental property. Of course, anyone looking to invest should consult with a qualified tax advisor prior to making a decision.
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Tax Advantages of Owning Rental Properties
