The 7 Primary Tax Benefits of Owning Rental Property
I read an article about this that is going to align pretty closely with this and which I will put a link to in the description down below. But I have been reading a TON about real estate lately, and as a prospective Tax CPA, am really starting to get into the interest of Real Estate on the tax side. I knew the tax advantages to owning real estate and renting out rooms were great, but I didn’t know just HOW great. It’s almost like the IRS has the hands around the throat of every single business but with Real Estate they’re like “scale, grow and make that money.” The Government, at least on the Republican side, I believe is basically subsidizing housing by giving as many housing advantages as humanly possible, nearly everything is deductible including travel, marketing expenses and software expenses, then we get into depreciation, how repairs to homes get added to cost basis which can FURTHER be depreciated additionally, how you get mileage write offs, home office deductions on property that you own, write offs for paying utilities, avoidance of FICA taxes because of some of the tax benefits and much more! Read on to find out the 7 primary tax benefits of owning rental property!
Your Maintenance and Operating expenses are tax deductible!
Yes you read that correctly. The more that I read about the tax code for real estate the more that I am seriously ready to jump into my first duplex deal, just have to find the right one and stack up my first $200,000 or $250,000 or so!
You can deduct every single maintenance and operating expense.
Need to fix the sink? Write off
Need to fix the toilet? Write off
Net Paint job
New Appliance (oven etc. gets depreciated over 5 years)
Throw in advertising costs, leasing commissions, property management fees, repairs and maintenance, supplies, yard work, bug guy etc. You name it, any sort of operating cost is a full on tax deduction here.
Primary Tax Benefits of Owning Rental Property – Your Mortgage Is Tax Deductible!
Even the interest on your mortgage is a tax deduction here. Let’s say that you purchase a $350,000 duplex. We take this and we put $100,000 down, this way we aren’t paying any private mortgage insurance on our loan and we get a better rate for the 20% down. Now we have a $250,000 loan, say you get a 15 year fixed and you have good credit right now, like an 800 credit score. Now we’re at a 5% rate on a 15 year fixed mortgage. The first year you will pay something like $12,500 in interest, amortized with the principal paydowns let’s be generous and say it’s maybe $10,000 or $11,000 in total interest here. This is fully tax deductible. Add to this the fact that even property owned on debt is still property “owned” in the eyes of the IRS. So you can still depreciate it even as its on mortgage, and the tax deduction for this, goes right back onto the mortgage! Between the rents and the tax credits that the Internal Revenue Code allows, you can see how the house literally pays for itself!
Depreciation Deductions, The Third Best Primary Tax Benefit of Owning a Rental Property
You can depreciate a rental property, off of its depreciable value, over a 27.5 year span of time. Say you own a $350,000 duplex, the land is worth $25,000. So you can depreciate $325,000 over 27.5 years. Right off the bat we have $11,819 per year that we can deduct from this home value. Add in that we can take modifications to the home (a new roof etc.) and increase your cost basis so that you can depreciate the home for longer, and you’ve got a pretty sweet deal here.
So on a rental portfolio of 3 Duplexes (we’ll keep this simple) that makes $90,000 per year in income in total.
Take $15,000 for home maintenance on appliances, depreciate this over 5 years for a $3,000 annual deduction.
Building value in total is $1,050,000, and depreciable value is $1,000,000 even. Amount is $36,364 that you can write off per year.
You cover all tenants utilities at $200 per month per renter. This is $2400 per year x 6 renters for another $14,400 in deductions for the year.
Now we add a new roof of $10,000 to our cost basis so we can depreciate costs for longer.
Write off 5% interest on an assumed $400,000 in remaining mortgages on the property. We have another $20,000 deduction here.
Say you work from home, deduct another $5 per square foot on a 300 square foot room.
Say you are a schedule C Sole Prop that qualifies for the QBI Deduction.
The math is that $90,000 in rental income now becomes.
$3,000 Appliance Depreciation
$36,364 in building depreciation
$14,400 Utilities Deduction for Utilities paid
$20,000 Mortgage interest for ordinary and necessary business purposes, deducted from AGI.
$1500 annual home office deduction.
20% off the top QBI Deduction for another $18,000 deducted.
No FICA taxes so just federal tax is paid at the end of the day.
Your $90,000 in rental income is now taxed at just $0.00! Really a loss if you max everything out, which at $3264, the amount I am getting here. Since these are passive losses, if I am not mistaken you can carry this forward to next years numbers also! This $20,000 tax savings can be put to pay down the mortgage, it is a massive compounding effect from the business structure and the tax breaks that you get on real estate!
Also there is no self employment/FICA taxes on rental income since it is PASSIVE INCOME! Hooray passive income tax benefits!
Traveling fees, marketing fees, home office, continuing ed, flights, hotels (within reason) these are all deductible.
Home Office Deduction
Another way to deduct even more money in taxes. Grant Cardone is not kidding when he says he pays NOTHING in taxes, the tax code is just amazing that way!
QBI Deduction for Pass Through Entities, Schedule C Sole Prop, Partnership, or LLC
Keep this in a pass through entity like an LLC or a partnership and do not do an S Corp as it rids the step up in basis benefits for when you pass the property onto your heirs. It is still a pass through entity however and so you would get many of the other benefits. With Real Estate avoiding FICA taxes anyway however, there is really no need for an S-Corp anyway.
Final Thoughts On The Awesome Power of Real Estate Tax Deductions, The 7 Primary Tax Benefits of Owning Rental Property
And there’s my tax rant on the awesome tax deductions present in Real Estate here, I would say that my tax education is coming along quite nicely!
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