Real Estate Income Property - a Super Smart Investment

Once you have purchased your first home, your next investment should be an income-producing real estate. Income properties aren’t just limited to single-family homes; it can be commercial property as well. Some investors prefer shopping centers, others warehouses. The possibilities are endless.

There are many tax benefits involved in owning your own home. The pride in owning your own property is unequaled. Such homes can be a single-family home, mobile home, condominium, apartment, or even a houseboat.

A basic rule of investing in income property is to never buy for the tax benefits alone. If a property isn’t sound without the tax benefits, chances are it’s not a wise investment. The tax breaks involved in owning income property should be viewed only as an added bonus. These bonuses are a major enough reason for buying income property rather than vacant land. A vacant lot offers almost no tax benefits, and produces little or no income.

Many real estate investors depend on resale profits as another bonus of investing in real estate. Properties that won’t make a return on your investment aren’t worth your time and effort.

Investors are property owners who contribute something to the property such as great management, physical improvements, or cash so someone else can use the property for their benefit. Investors tend to have reasonable property management policies which are fair to tenants. They also have expert financing techniques to use other people’s money to purchase and improve a property. All investors have use of ownership tax aspect to maximize their return on investment.

Real estate helps many investors realize their goals. Some goals include increased cash income, a hedge against inflation, providing a job from owning and maintaining property, opening up profit opportunities through real estate.

One of real estate’s major attractions is its ability to shelter the owner’s ordinary income, such as salary, from income taxes. A profitable example of this is an apartment building that produces rent money from tenants. The property owner uses that money towards operating expenses such as taxes, repairs, utilities, water, and insurance on the property. After you calculate all of these costs, plus mortgage interest, you are left with a positive or negative cash flow from your investment.

Don’t forget about the non-cash tax deduction for the buildings depreciation. Income tax depreciation is a bookkeeping estimate for wear and tear. It requires no cash payment to be entitled to this deduction.

Tax-deferred exchanges are a great way to avoid depreciation recapture and profit taxation when disposing of one property and recapturing another.

In fact the 1981 Tax Act’s anti-churning provisions state clearly that if you make a tax-deferred exchange of business or investment real estate for another such property, your old basis and its old depreciation methods carry over to the newly acquired property. The new fifteen-year, 175 percent accelerated depreciation methods can only be used on the increased depreciable basis of the property acquired in the exchange.

Investment tax credit doesn’t apply to personal property acquired by most real estate investors for use in their properties; however it does apply to vehicles.