The Tax Advantages of Owning Rental Properties

The Tax Advantages of Owning Rental Properties
The Tax Advantages of Owning Rental Properties

The Tax Advantages of Owning Rental Properties

When the end of the year approaches, many of us have the potential to get distracted by visions of sugar plums and thoughts of the holidays.  For investors, business owners and contractors, however, the holidays are a time of year when the ominous loom of tax liabilities have the potential to cast a shadow over any holiday gathering.

Even for the employee who is lucky enough to be expecting a refund, it is always fun to think about a creative new way to reduce that gross taxable income.  Of course, savvy real estate investors in Wilmington, North Carolina know that owning a rental property is a very effective way to offset other types of income.

The operating expenses that originate from owning a rental property can be used as a tax deduction.  These expenses are in addition to mortgage interest and real estate taxes.  Some of the operating expenses that may be deducted include repairs and maintenance, insurance, utilities and property management.  Local travel to and from the rental property can also be deducted.

For owners of investment properties who are located far away from their local area, the expenses that accumulate for hotels, meals and airfare can be deducted.  As these deductions could potentially offset the cost of travel to a destination with great beaches or a lively riverfront, such as Wilmington, for example, this could make purchasing real estate investment properties out of town a strong financial strategy.  It should be noted, however, that expenses like these are scrutinized by the IRS.

One of the chief advantages to owning rental properties is depreciation.  This provides the owner of a real estate investment property with the chance to deduct a portion of the property value from their gross income each year for 27.5 years.  After understanding that the yearly depreciation for a home valued at $200,000 would be $7,273, it is easy to see why investing in real estate is a popular choice.

There is no other form of investment that offers depreciation.  In the scenario described above, the investor could have up to $7,273 in cash flow that would be tax free.  When multiple rental properties come into play, the effects get even stronger.  It’s worthwhile to point out that the value of the actual, physical structure is the only thing that can be depreciated, since the value of land never goes away.

Rental properties also have the potential to appreciate in value significantly.  In a robust and thriving real estate market such as Wilmington, this creates a tremendous upside.

There are a number of additional tax advantages that can be achieved owning a rental property.  In some cases, it may be possible for a landlord to qualify to use home office and/or workshop expenses to reduce gross taxable income.  Fees that real estate investors pay for professional services may also be a deduction.  Professional services fees can include fees that are paid to an attorney, an accountant or a property management company.

Along with the potential of real estate to generate life-changing wealth, which I wrote about in a previous article, the tax advantages alone make purchasing a rental property a sound financial strategy.  Of course, it should be noted that anyone who is considering making the leap into real estate investing should consult with their tax advisor before they make a decision.

If you are considering investing in real estate, have questions about this article or would like a referral to a property management company, give me a call at 858-692-5120 or email