Reducing Your Tax Burden by Owning Real Estate

April 2009:

With tax season in full swing and April 15th just a few short weeks away, we figured it would be appropriate to discuss the significant tax benefits that accompany real estate ownership.

With real estate, there are tax advantages available while both owning and selling real estate.  Let’s first discuss the advantages available during the course of real estate ownership:

Mortgage Interest Expense
The government allows all of the interest associated with the financing of the property to be written off as an expense of owning the property.  For many real estate investors, especially those with interest only loans, this expense deduction can be substantial.

Depreciation
Depreciation is a method for matching the costs of acquiring property over the properties estimated economic life. The IRS now requires that most properties be depreciated using the straight-line method of depreciation (27.5 years for residential properties, 39 years for commercial properties).  Depreciation will act as an intangible expense and will shelter income from taxes.

Expense Deductions
Many of the costs associated with owning and managing a real estate investment, such as management fees and insurance premiums, are deductible.  One deductible expense worthy of note is the travel expense.  Many real estate investors acquire real estate in places they like to (or have to) visit, and each time they travel to the property, the travel costs are a deductible expense.  Not a bad deal if the property happens to be in Maui, or around the corner from a relative.

Passive Losses
Due to depreciation and expense deductions, it is possible to own a property that is producing positive cash flow, but for tax purposes showing a loss.  These “passive losses” are subject to certain restrictions, but in many circumstances can be used to offset passive income from another investment.  In the event an investor qualifies as a “full time real estate professional” passive losses can be used to offset ordinary income.  Full time real estate agents should have no problem qualifying for maximum passive loss benefits (see recent US tax court opinion) .

Source:  Leonard Spoto