Thanks to low interest rates, record numbers of foreclosure properties hitting the market and a surging rental market, current conditions are ripe for taking the plunge into rental property investing. And as Jason Hartman advises, becoming a real estate entrepreneur opens the door to significant tax breaks from a US tax code aimed at supporting small property investors who manage their own investments.
One way to launch a steady income stream for retirement or simply for living is to purchase one, or a s Jason recommends, more than one, rental property, turn it over to a management company and collect the monthly rent checks. You’ll be reaping the benefits of passive income that generates a return on your investment. Not only that, but you can also take the usual tax deductions allowed for maintaining and upgrading your property.
But by becoming not just an investor, but an entrepreneur committed to the hands-on management of your property or properties, you’ll be able to reap even more tax benefits than if you outsource all the management of the properties — starting with the most obvious: your home office.
Maintaining a space dedicated exclusively to your rental property business and related activities establishes you as a professional and establishes a place to maintain records and store documents. Many newly self-employed people avoid taking deductions for home offices for fear of triggering an audit, but these deductions are legitimate for your real estate activities.
Travel to and from your properties, as well as travel required for upkeep and maintenance, also constitutes an appropriate deduction. If you own a property outside your local area and you travel back and forth to deal with a maintenance issue, or if you make multiple trips to meet with contractors or to get supplies, you can list these expenditures.
If one or more of your properties fails to turn a profit, as an entrepreneur you may be able to deduct for passive activity losses, or PALs, if you take an active role in managing your holdings—but not if you employ a property manager. For example, if you post an adjusted gross income of under $100,000 and do tasks such as screening tenants or making repairs, you could be eligible for a passive activity loss deduction of up to $25,000 if you posted an income loss for the property that year and had positive income from other properties you owned. And, when your properties do turn a profit, that positive taxable income you receive is exempt from self-employment taxes, even though you’ve established yourself as an entrepreneur.
Investing in rental property opens the door to many challenges, as well as new opportunities to take the reins of your financial future. And by becoming a real estate entrepreneur, you can take advantage of the numerous aspects of US tax law designed to support hands-on property owners just like you.
The Jason Hartman Team