Know Your Tax Benefits of Owning Rental Property
Most investors shy away from the rental property business because they believe that it is too complicated and too much work. But they are either sadly misinformed or they did not make the necessary research on the business as it is neither plus they do not have any idea on the advantages owning a real property when it comes to the tax benefits it involves.
As in any business, you can hire a property manager to take care of the minute details that owning a rental property has pertaining to repairs and attending to the needs of the tenants. You don’t have to worry but receive the income from it and let your property manager handle the rest. In case of the paperwork especially with the financial reports and taxes, you can always get a CPA to do it for you. Here is some information that will give you an idea about the tax benefits of getting into the rental property business.
All expenses incurred pertaining to property maintenance are part of taxable deductions like insurance, cleaning, repairs, advertising, and even what you pay your property manager. Interest on your mortgage payments is also tax deductible.
There is also what they call Phantom Cash which by its name means the money doesn’t really exist. It is in fact a government incentive given to benefit investors on real estate. It states that you can deduct a certain amount from your taxable income every year. You get the amount deductible by dividing the value of the rental property by 27.5 years. For example, the property is valued at 50,000 and you rent it out for $600.00 a month that would make a taxable income of $7,200.00. The amount deductible from it is $ 1,818.00 ($50,000/27.5) making your taxable income at $5,382.00.
Another benefit is tax deferred on any gain you get from selling your property if you have any intention of getting into another real estate investment. Once your property has appreciated in value and you sold it, you need to pay tax on the capital gained from the transaction. But the government offers a form called 1031 wherein you can defer paying the tax from the sale by giving you an option to invest in a more valuable real estate. A third party safeguards the money for a period of time until you get another property.
There is also the added benefit of the home equity loan which is tax free. This also deals with the value of the property appreciating. You can get a home equity loan tax free from this. It is the difference between the appreciated value of your home and the balance of your mortgage. For example, your rental property is originally valued at $50,000.00 and in five years it has appreciated in value to $60,000.00 and also by that time your outstanding mortgage stands at $45,000.00. You can get a home equity loan of $15,000.00 (60,000 less 45,000) tax free which you can use for investing in other real estate deals or other businesses.
Rental property is one business that has a lot of advantages. In fact most says that it is one of the best investment vehicles available due to the tax benefits offered.
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