It’s not always fun to talk about taxes, unless you’re a real estate investor.
One of the most common things that is overlooked in real estate investing is tax planning. There are a lot of tax savings that can be found in your investment goals, and you need to figure out how to dig them out. The government allows you to depreciate an asset that you put in service. That depreciation schedule can affect your ROI, especially when the IRS dictates the economic life of your asset.
Economic Life of Real Estate
In real estate, the economic life of your investment property is 27 and a half years. For example, if you purchase a property for $300,000 and the value of the land is $25,000, and the land cannot be depreciated, you will end up with the property value of $275,000 that is depreciable.
If you divide that amount by 27 and a half years, you will have a $10,000 tax write-off every year just because you own the property and the government believes it is depreciating.
But wait, there’s more. If you earn $75,000 a year, the $10,000 loss lowers your annual income to $65,000, so you’ll pay taxes on just the $65,000. The tax savings can translate right into money in your pocket.
Evaluate your Potential Investments
When you are evaluating a piece of real estate to see if it is worth investing in, or you’re trying to decide whether you should hold onto a property for a little longer, you need to consider all the income stream that it brings to you. This includes:
- Tax savings
- Appreciating market value
- Cash flow
- Debt reduction as the tenant is paying down your mortgage
You need to do the math before you make the purchase and before you decide to sell your asset. Put it all together and look at the whole picture so you can really see what kind of returns you are getting on your equity or initial investment.
Real Estate Investing Benefits
These tax savings are some of the most important reasons that real estate investors across the country invest in multiple properties. As long as they have tenants in place to pay for the mortgage and other expenses, it’s worth building an entire portfolio of properties. Even if the property is just breaking even, they have great tax write-offs on the rental home while they are in their income-earning years.
By the time real estate investors retire, they will have the property paid down or paid off completely. This way, they their tax write-off helps when they need it the most, and they can build up a nest egg now and then decide what to do with the property later.
This is one of the reasons that real estate is one of the best retirement vehicles out there.
We love discussing this with our current and potential owners and investors. If you have any questions about the rental property tax facts or property management in Phoenix, please feel free to contact us at Service Star Realty.