The smart individuals who put their capital into real estate can profit from rental income from their properties, as well as from the resale of the said properties. But, that is not all. There are also many neat ways to reduce taxes. In this piece today, we will show you many a splendid tax saving solution so that you can easily adapt to the changing market.
Benefits of Investing in Real Estate
One of the most wonderful benefits of this type of venture is that you get to diversify your portfolio. That means that you are less likely to get hurt by unpredictable fluctuations in the stock market.
But, there are other splendid things, as well. Here are some of them.
At first, the owner of real estate has to make mortgage payments every month, as well as paying some operating expenses. However, once the mortgage has been repaid, almost all monthly rental income is profit.
Another benefit of investing in real estate is that it helps protect against the effects of inflation in three main ways.
If property values in a certain location rise more than the overall rate of inflation rises, the property owner can charge more rent each month. That means more profit. On the other hand, if inflation goes up more than property values, real estate owners can just increase the rent to maintain the same profits.
Finally, property owners are often able to secure fixed-rate mortgages. These are mortgages where the monthly rate remains the same, even as the prices of everything else increase. That means the mortgage repayments become less and less expensive in proportion to other prices.
Depreciation and Appreciation
Even if a property is brand new and in perfect condition – and even if the owner keeps up with regular maintenance, as time passes, the condition of the property deteriorates. Generally speaking, most of the costs associated with owning and maintaining a property can be deducted from property real estate investors’ monthly tax payments.
For tax purposes, it’s assumed that a residential property will have fully depreciated after 27.5 years. In other words, at the end of that period, its value will be 0. That means that the property will lose a little over 3.5% of its value each year for nearly 30 years. Property owners can count the yearly loss of value of the property as a cost, comparable to other costs of maintaining the property – and deduct this cost from their taxes.
Another thing that’s really great about investing in real estate is that your investment is virtually guaranteed to appreciate in value over time. Buildings and land get more expensive over time – that’s just the way it works. The same goes for rental income. As the costs of living continue to rise, the amount of rent people have to pay also keeps increasing.
There are two main tax optimization strategies that can save real estate investors a lot of money. Exactly how much money can be saved depends on many factors, but in an average kind of case, it might be something like tens of thousands of dollars saved in a year.
Strategy One: Set Up a Management Company and Pay Yourself
Anybody who owns property has to play a kind of managerial role. For many people, the idea of setting up a management company to manage their own properties just wouldn’t cross their minds. However, when a company, rather than a private individual, is responsible for a property, many expenses related to managing that property become tax deductible.
For example, the expenses incurred in setting up a home office could be deductible – so could expenses related to the vehicle used to drive between the properties, and so could a cell phone and other supplies.
Strategy Two: Make Strategic Use of Cost Segregation Studies
Real estate owners can expect the actual buildings to last a pretty long time – but things like flooring, lighting, and appliances are normally much shorter-lived. That means that even when a certain building is still standing, these other components of the property can be written off. When a cost segregation study is performed, the value of such components of a property can be depreciated more quickly, which can spell tax savings.