Invest In Real Estate To Reduce Taxes
When you invest in real estate what you basically aim to achieve is the maximum returns on your investments. Fortunately, apart from what you earn directly through the returns on your investments you stand to make some additional earnings through reduction in your taxes when you invest in real estate. That is precisely the reason why a large number of investors prefer real estate investment to other forms of investment.
Taxes form a large part of your annual expenses. So you can't ignore the tax benefits that will accrue from your investments in real estate. You can get a variety of deductions from investments in real estate. Your active involvement in real estate investment including setting rent, approval of tenants and determining capital improvements would help you qualify for various tax benefits.
You may also get an interest deduction equivalent to your mortgage loan interest. It means that the interest payable on the mortgage amount for the first year will allow you to offset the same amount of income that would otherwise be subject to income taxes. Property taxes that could be levied against that property would also be deducted from your taxable income. Such a deduction is not available to the usual homeowners.
The maintenance expenses that you incur on carrying out repair work for a property are also deductible when you calculate your tax liability. For instance, expenses incurred on repairing the rotten wood floors or similar ones, which are undertaken to keep the property in a good shape, can be deducted from your other taxable income. However, the expenses incurred to increase the market value or life of the real estate do not fall under this category of deduction. The benefit of such a deduction is meant only for investment property and not for the homeowners.
Maximum tax benefit results from depreciation, which is decline in the value of a property over a period of time. As a result of depreciation the accounting value of a real estate asset decreases, which is not the same as a decrease in the market value of that property. Thus the amount of decline in the accounting value of your property can offset an equal amount of exemption from your tax dues. The depreciation is calculated over a period of 27 and a half years for a residential rental property and 39 years for a commercial investment property, which is the established economic lifetime. However, land is not depreciable from the point of view of tax benefits. Whenever a property changes hands the depreciation schedule starts all over again.
To a certain limit, investment property losses incurred during a year can be saved and taken forward to reduce the amount of passive income and the rental income in the future years. If you are unable to use it in any of these years you may use the same when you sell the property, although it has some restrictions. A tax advisor can be good assistance on these matters.
Please bear in mind that when you sell the property within a year of investment you stand to lose a substantial amount of tax reduction. This is because the short-term capital gain attracts a tax at the same rate as you have to pay on the ordinary income. To get the long-term capital gains tax break you should try and hold the property at least for a year or more. If you are dealing in multiple properties the IRS may consider you as a dealer. A dealer does not get the capital gains and depreciation tax benefits that an investor does.
Investment in real estate helps you to avail of substantial rebates in tax. It is only a matter of your being conversant with the rules and regulations related to it.
Written by: VD
Date Written: 02 July 2008
Reviewer Assigned by: David
Reviewed by: HS
Quality Control: AG
Copyscape Results: Nothing copied
Webmaster Results: Nothing copied
Subheadings: Not Required
Common Error Check: Done
Spelling and Grammar: Done
Quality Control Completed on: 07/07/2008
About the Author:
Real Estate Investing Experts Kim and Charles Petty have been involved in over 700 real estate transactions in the last 9 years and are the creators of the Ultimate Turn Key Virtual Real Estate Investing Systems. For a FREE Special Report and Audio on how you too can make Six or Seven Figures A Year Buying and Selling Properties across the USA & abroad go to http://www.VirtualRealEstateInvestingProfits.com or call 1-800-311-9228.