RENTAL PROPERTY TAXATION

Rental properties can be a true path to wealth. The return on investment can be very favorable, though there is a moderate to high barrier to entry. But people manage, because it’s worth it. Want to start planning? Just Google ‘what is down payment for a rental property’ and ‘ways to come up with a down payment for an investment property.

Rental ownership is helped immensely by good use of the tax laws. A tailored plan for use of depreciation and a knowledge of other deductible expenses can produce a paper loss that can significantly reduce taxable income, especially during the first few years of ownership. If taxable income is lowered, you have more money in your pocket and more things can happen. And depreciation can be used in many ways besides the usual straight-line 27.5 year calculation. When things like cost segregation and bonus depreciation or Section 179 deductions are thrown into the mix, good things for the owner can happen, but it takes some planning.

Property rental doesn’t just mean buying a property and renting it out. Most are aware that you can also rent out part of your home or your vacation home in AirBnB type rentals. Or use the Augusta rule to create non-taxable income if you rent out your home for less than 14 days per year (a common practice if you live near sports stadiums or other popular venues). Such acts can help you create extra income and substantial tax benefits under a number of circumstances.

The paths to wealth taken differ from family to family, but most I’ve seen are in the following groups, and they’re all exciting:

• Buy one or 2 houses and let others pay your mortgage over the years. Then at some point, sell the properties and use the money for retirement or inheritances or ???
• Buy a house and continue to buy properties, eventually selling or exchanging for multi-family homes (duplexes, 4-plexes, etc.).
• Move from the step above to commercial properties where the risks are higher but so are the rewards
• In one case I’m aware of, an investor started with a number of family members, bought several residential rentals over the years, traded them up to commercial properties and at one point, jumped to development, eventually developing 2 plots of land for residential homes.

The most common problem I see in real estate investments is cash flow, especially with the price of houses today. And that’s where your tax guy comes in. We have helped many increase their cash flow by maximizing expenses, especially with depreciation and other tax planning, and we don’t charge an arm and a leg for our services. Whether you’re buying, selling or holding, we can help.

If you’re looking for quality tax preparation services at a reasonable price, give us a call at Aurora Financial Services, 303-745-3962.

Free consultations available.
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