With rental properties -or, Rent Estate(tm), not only can you benefit from cash flow and long-term appreciation, you're also allowed substantial tax write-offs. When compared to other investments, you can see a wealth of valuable tax advantages from the investment opportunity known as Rent Estate.
Unlike house flipping, where you have a sudden influx of cash, rental property is all about the long-term approach. But from a tax standpoint, the long-term investments often pay off. When you sell a home, there's a good chance that most of the income will be taxable, something that can easily negate any profit that would have been made. But on the flip side, Rent Estate offers more tax advantages than just about any other investment. In fact, your rental income can even be tax-free -as long as you don't have a net cash flow after your deductions.
Surprisingly, though, most people aren't aware of just how many tax advantages Rent Estate offers. "A lot of deductions people may overlook," says Stephen Fishman, author of "Every Landlord's Tax Deduction Guide." That's something that can add up significantly over time.
All of this while your mortgage is being paid down, and the amount of equity you have in the home continues to grow.
With tax season quickly approaching, let's take a look at some of the primary tax advantages that rental property offers. Here are some tax breaks that are available to you if you invest in Rent Estate.
Interest Deductions
Mortgage interest is often a significant cost that can be deducted. In most cases, mortgage interest is a recurring amount every month until your property is paid off (you should be able to find the exact amount on your bank statements). Interestingly enough, this deduction means that if you cash-out refinance your mortgage, your increased interest payments can be deducted as well. Additionally, interest on loans for improvements to the property, or on any credit cards that you use for the rental can also be written off.
Depreciation Deductions
One of the most misunderstood tax deductions is depreciation. Depreciation is based on the concept that the property is going down in value every year -something that's not usually the case, when you consider that home prices generally appreciate significantly over time. Nonetheless, it's an excellent deduction that you can use to offset your rental income. If you claim depreciation on the building and contents as a whole, it must be spread out over a period of 27.5 years, but many landlords opt to use cost segregation, which allows them to depreciate the building and the contents separately and according to different timelines. For instance, furniture is depreciated over five years. Using segregation allows you to maximize your depreciation deductions for the first few years.
Operating Expenses
When you own a rental, most expenses for the property can be used as tax write-offs. This includes repairs and maintenance for the rental, as well as travel expenses to and from the property -something that's especially helpful for long-distance landlords. Of course, if you pay utilities or similar expenses, they can also be deducted. Insurance premiums can also be written off -including policies for fire, flood, theft, and liability. Another often-overlooked expense is professional services for the rental. This means that legal services, real estate investment advisors, accounting advice, professional tax preparation and even tax software, as well as property management fees can all be included as tax deductions. Just make sure you save your receipts, and keep good records that clearly show what each expense was used for. This will make it easier when tax time rolls around, and if you're ever audited, clear records will prove to be a lifesaver.
While house flipping is lauded as a great way to make quick cash, it's worth noting that tax laws tend to favor long-term investments over short-term ones. When you sell a home, you're responsible for capital gains tax. However, when renting out your home, you won't have to worry about sacrificing a huge percentage of your income for taxes; thanks to the fact that you'll be able to write most, if not all of your expenses off. Some great tax advantages can be seen from this.
As always, though, before investing in property or turning your home into a rental, it's worth consulting a professional accountant. You'll want to get a clear idea about what you can expect regarding taxes, so you'll be able to calculate projected profit and loss, and accurately weigh up your investment options.
Are you interested in Rent Estate and the tax advantages you can begin to take advantage of? Learn more about all of these tax benefits by downloading out guide to The Primary Tax Advantages Gained from Rent Estate.
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