Rental Properties and Tax Benefits

If you’ve been washed out by the volatility in stocks and mutual funds, try investing in rental properties – they just might be your niche investment idea.

Rental properties not only bring in money to the investor in terms of the rent money from tenants, they also fetch you money from tax deductions. You might think of owning and renting property as a day to day business. This means you would have to be involved in all the wheelings and dealings of your rental property. That includes being an active participant in the approving terms and conditions of a contract agreement, interviewing possible tenants,  or approving expenses that go toward maintaining your building. Even if you decide to hire a property manager, you will still have to get into the nitty gritty details stemming from your rental property.

Like any other business, the majority of your operating expense deductions will come from the capital you have spent on the property. These tax deductions relate to mortgage interest, repair on property, property taxes, insurance deductions, and maintenance costs. The good part is – one expense that does not involve any money is property depreciation.

Depreciation works well for the rental property owner since it allows for a write off of the largest expense, which is the purchase price for the rental property. However, this will not include the land. In addition, depreciation also reduces your basis for projecting profit or loss, should you decide to exchange or sell your property at any time.

Better yet, if you’re considering spinning off your rental property, there’s a way to get some deductions on it as well. When you sell property you will owe taxes on the gain you make. If you want to get around the issue of paying taxes while selling, you might want to exchange your rental property for one that is a like-kind rental real estate. Moreover, the government offers tax credits to those who are interested in developing low-income housing projects, particularly old commercial buildings. These tax credits go toward a direct deduction on your taxes and they may vary from 10% to 90%. These tax breaks are like incentives for investors who would want to buy rundown buildings and fix it up. It’s a win-win scenarios since this prevents the building from further dilapidation. However, you will need to do some research as the government has strict stipulations about what properties qualify for incentives.

The IRS advises landlords of rental properties to collect all records of rent-related activities, which includes receipts and invoices. This is to be reported on the Schedule E, Supplemental Income and Loss part of your tax return, when you file taxes. To cut down on your time, try experimenting with software programs like ‘Tenant Pro’ or ‘Quicken Rental Property Manger’ to assist you in maintaining records. This could prove to be cheaper than hiring a property manager to track your transactions as well.

Incidentally, in the wake of a recession, the rental property segment offers prospects for potential income for those who have the luxury to rent out properties. This investment is essentially by way of ‘double returns’ if you account for the fact that you may be able to derive tax advantages from Uncle Sam apart from your rent-revenue. If you’re considering an investment strategy in real estate, rental property investments could be the one for you. It could be a new wave of investment potential in real estate.