Lower Your Taxes:
Tax incentives can often make the difference in a real estate investor’s tax rate. Deductions for rental properties can often be used to offset wage income. Tax breaks can often enable investors to turn a losses into profits. What items can investors get tax breaks on?
You can claim deductions for actual costs you incur for financing, managing and operating the property.
These Can Include:
Mortgage Interest Payments
Real Estate Taxes
Property Management Fees
Utilities (assuming the tenant doesn’t pay them)
These expenses can be subtracted for your adjusted gross income when determining your personal income taxes. Of course, these deductions cannot exceed the amount of real estate income you receive.
In addition to deductions for operation costs, you can also receive breaks for depreciation. Buildings naturally deteriorate over time. These “losses” can be deducted regardless of the actual market value of the property. Since depreciation is a non-cash expense, you’re not actually spending any money so the tax code can get a bit tricky. For more information about depreciation and various tax alternatives, ask your tax advisor about Section 1031 of the U.S. Tax Code.
Have a Positive Cash Flow:
There are two kinds of positive cash flow – pre-tax and after-tax. A pre-tax positive cash flow occurs when income received is greater than expenses incurred. This sort of situation is difficult to find, but they are usually a strong and safe investment. An after-tax positive cash flow may have expenses that outweigh collected income, but various tax breaks allow for a positive cash flow. this is more common, but it is generally not as strong or safe as a pre-tax positive cash flow. Regardless of what kind of real estate you choose to invest in, timely collections from your tenants is absolutely necessary. A positive cash flow, whether is be pre-tax for after-tax, requires rental income. Be sure to find quality tenants. Doing a thorough credit and employment check is a good idea.
One of the most important factors in determining a solid investment is the amount of equity you are purchasing. Equity is the difference between the actual worth of the property and the balance owed on the mortgage.
Benefit from Growing Equity:
While investing in real estate is relatively complex, it is often worth the extra work. When compared to other financial investments like bonds or CD’s, the return on investment (ROI) for real estate purchases can often be greater. The key to real estate investing is equity. Determine an amount of equity that you want to achieve. When you reach your goal, it’s time to sell or refinance. Determining the proper amount of equity may require the assistance of a real estate professional.
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