Tax benefits of Real estate investing
As a rental property owner, perks such as deductions on all resources and expenses you incur to manage the property. You can even write off the interest you pay on the loan of the property as well. Also, you can take down the number of miles you drive to your property/properties for the government standard deduction of .57 cents per mile. A lot of other small expenses can even be written off such as cell phone, printing materials, etc. if they are used for your property. Always be sure to consult with your CPA before assuming all things can be written off.
Over time, properties lose value as they begin to age. This decrease in value is what is considered depreciation. You can write that margin of depreciation on your taxes. If you spread out the depreciation over separate years. If you purchase a property worth $150,000 and the land is worth 10% ($15,000) and the home itself is worth 90% ($135,000), you can write off the 90% ($135,000) over what the IRS deems the deductible life of a property which is 27.5 years.
$135,000 / 27.5 = $4,909
You can now deduct this $4,909 off your taxes annually for your rental property.
Downside of Depreciation
Despite being able to deduct depreciation, the IRS will try and recollect some of that money in what’s called recapturing of depreciation. Recapturing of depreciation is currently rated at a hefty 25% taxation. Going back to the previous example, if we owned that property for ten years and then sold we would have written off $49,090. When we sell this property, the IRS can tax us 25% on the $49,090. If the gain on the sale was only $30,000, the IRS will only tax you 25% on the gains, not the total written off on depreciation.
No Self-Employment Taxes or FICA
Being a real estate investor is not seen as being self-employed to the IRS, which is a good thing. This means you won’t incur self-employment or FICA taxes which is approximately 15+%. Only thing you must be careful with in this situation is the strategy in which you hold the properties. If you try to hold the properties under a company name and pay yourself a salary you may get whacked with the self-employment/FICA taxes.
FREE MONEY! Tax Free Refinances/2nd Mortgages
You purchased a property for $100,000, but still owe $50,000 and you’re not sure what to do, what do you do? Here’s one of the biggest perks of being a real estate investor. If you go and refinance the loan for $75,000. After you pay off the original $50,000 you have $25,000 left over to do whatever you want with it. The perk of this is that, that $25,000 is not taxable, so you can use it freely without worry for the long term.
The perks don’t stop there. If you use your proceeds from the refinance on your primary home, or another investment property, you can likely deduct the interest paid on the loan as well.
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