Real Estate Tax Incentives
By Neda Dabestani-Ryba
Lower Your Taxes
Tax incentives for real estate investors can often make the difference
in your tax rates. Deductions for rental property can often be
used to offset wage income. Tax breaks can often enable investors
to turn a loss into a profit.
For which items can investors get tax breaks? You could claim
deductions for actual costs you incur for financing, managing
and operating the rental property. This includes mortgage interest
payments, real estate taxes, insurance, maintenance, repairs,
property management fees, travel, advertising, and utilities (assuming
the tenant doesn't pay them). These expenses can be subtracted
from 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
operating costs, you can also receive breaks for depreciation.
Buildings naturally deteriorate over time, and these "losses"
can be deducted regardless of the actual market value of the property.
Because depreciation is a non-cash expense -- you are not actually
spending any money -- 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 flows: 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 it be pre-tax or after-tax
-- requires rental income. Be sure to find quality tenants; a
thorough credit and employment check is probably 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 balanced 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 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.
Neda Dabestani-Ryba is a licensed Realtor in Maryland. She is
a member of the President's Circle of Top Real Estate Professionals.
She can be reached at (800) 536-3806 or visit her website for
more information: http://neda.dabestani.pcragent.com/
Prudential Carruthers REALTORS is an independently owned and operated
member of Prudential Real Estate Affiliates, Inc., a Prudential
Financial company. Equal Housing Opportunity