When we are young, we think a lot about the kinds of purchases we will someday make. We count our allowance and evaluate the value of each purchase over and over. Because money is scarce, we think more carefully about how we spend it, more carefully than most adults. We’re good at evaluating deals and better at making smart investments. We’d certainly purchase something that would both earn and save us money before something that would sometimes earn money and always require additional payments. If you want to invest as an adult with the frugality and careful thought of a child, we have some great news!

Real estate is the most tax-favored asset in America, so it’s worth an exclamation point. While you may think taxes are boring (many of us mistakenly do) we’re here to tell you that you couldn’t be more wrong. For the smart income property investor, taxes are exciting because they save you a lot of money in the long run. While taxes can be life’s largest expense, they don’t have to be—put your money in only those assets that are tax-favored and build your wealth more quickly.

Simply put, a tax-favored asset is just an asset that does not tax its profits as heavily as other types of investments. Real estate investments are great because they offer tax breaks for things like depreciation, capital improvements, and repairs.

Real estate is both the land and the structure on the land. Because the land isn’t going anywhere, we’re most interested in the packaged commodity of the structure, which is potentially fluid in price based on things like home improvements. Such improvements, directed toward maintenance or improvement of the income property, are tax deductible. Certain vacancies qualify for tax breaks, as do non-cash write offs for structure depreciation, calculated over approximately 30 years. But you can also count travel to manage a property, costs associated with conducting business (home offices, the hiring of professionals). And these things aren’t one time—they’re good for the life of the investment.

Plus, you’re often putting money toward your income property that will increase the amount of money you make in the long term. Improved homes yield higher rents, which (as an owner of property) is your primary source of income from the rental. (photo credit: Jason Farrar via photopin cc)

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The Jason Hartman Team

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