Tax Advantage of Investing in Real Estate
Real estate is one of the smartest places to invest your money due to the various tax advantages and benefits for homeowners. Rental real estate properties have some great tax write offs you can take advantage of. The three biggest and most beneficial tax write offs for homeowners on their rental properties are in interest, repairs, and depreciation.
Homeowners can deduct mortgage interest and real estate taxes on rental properties. As J.D. Stephen Fishman explains, “Interest is often a landlord’s single biggest deductible expense. Common examples of interest that landlords can deduct include mortgage interest payments on loans used to acquire or improve rental property and interest on credit cards for goods or services used in a rental activity.”
Homeowners can also write off all the other standard operating expenses that go along with owning a rental property: repairs and maintenance, utilities, insurance, yard care, association fees, etc. As long as you claim those repairs in the same year the costs were incurred, they’re fully deductible. Typical repairs might include fixing gutters or floors, fixing leaks, plastering, or replacing broken windows.
The depreciation write off is the real kicker. On your taxes, you can depreciate the cost of residential buildings over 27.5 years, even while they are (hopefully) increasing in value. Bill Bischoff of MarketWatch provides this example: “Say your rental property cost $200,000. The annual depreciation deduction is $7,273, which means you can have that much in positive cash flow without owing any income taxes. That is a nice benefit, especially if you own several properties. Commercial buildings must be depreciated over a much-longer 39-year period, but the depreciation write-offs will still shelter some of your cash flow from taxes.”
Other tax write offs at your disposal as a homeowner are:
Local Travel: Landlords can claim a tax deduction whenever they drive somewhere for their rental property. For example, if you drive to your rental building to deal with a tenant complaint or go to the hardware store to purchase a part for a repair, you can deduct your travel expenses.
Long Distance Travel: Even if you travel overnight for your rental activity, you can deduct your airfare, hotel bills, meals, and other expenses.
Employees and Independent Contractors: Anytime you hire a resident manager, a repair person, etc. to perform services for your rental property, you can deduct their wages as a rental business expense.
Legal and Professional Services: You can deduct fees to attorneys, accountants, property management companies, or real estate investment advisors as operating expenses as long as the fees are paid for work related to your rental activity.
Rental real estate provides more tax benefits than almost any other investment. If you’re looking to invest, real estate should be something to really consider.