There’s an old saying, “Nothing’s certain but death and taxes.” While the former may hold true for everybody, the latter does only for some groups of Americans. Still, whatever an individual’s own tax bracket may be, taxes are a fact of life and touch most of us in ways small or large. Although the prospect of dealing with taxes is never appealing, the tax benefits associated with rental real estate can put money in an investor’s pocket every year.
Along with recommendations to invest wisely with good counsel, Jason Hartman’s 10 Commandments for Successful Investing advises investing in assets that offer tax breaks. Commandment 10 states, “Thou shalt invest only in tax-favored assets.” And rental real estate offers a number of non-cash write-offs and deductions that can be taken every year for virtually any activity associated with the property.
As Jason Hartman says, “income property is the most tax-favored asset in America.” Since this type of investment is also one that appreciates over time, it offers investors a number of ways to reap financial benefits, from tenant rents to the tax breaks for depreciation, repair and capital improvements that can be taken for the life of your investment.
Real estate consists of just two things: land and the structures on the land. And while the land isn’t going anywhere, there are limited options for what to do with it. But the structures on the land – “packaged commodities,” to use Jason Hartman’s term – can be fluid, as the prices of housing components fluctuate depending on local and global demand. And it’s these commodities that offer improvement value which can contribute to financial gains in a number of ways.
According to current US tax laws, virtually any funds an investor directs toward maintaining or improving an investment property can be tax deductible. Some deductions can also apply to periods of vacancy – the so-called passive activity loss break – as well as a non-cash write off for the simple depreciation of the structures themselves, calculated over about a 30 year period.
Travel related to managing the property is also tax-deductible, as are other costs of doing business such as maintaining a home office or fees associated with hiring consultants, specialists or managers. Some benefits reward hands-on management, with additional breaks for owners who spend a certain amount of hours annually on activities associated with maintaining the property. And, unlike other kinds of investments, the deductions related to rental income property are gifts that keep on giving for as long as you own the property.
Tax-deductible maintenance and long-term improvements offer benefits in another way as well. Improved properties can charge higher rents – and the “income” from rental income property arrives largely in the form of rents from tenants. But owner friendly tax laws also help to make rental income property the best of tax-favored assets, with a range of deductions and write-offs associated with nearly every aspect of managing your asset over the lifetime of your investment. (Top image: Flickr/soundfromwayout)
The Jason Hartman Team