Owning rental property is a great wealth building
tool. Less well known is the fact there are also rental property tax
advantages.
For
tax purposes, rental property is handled less like your primary
residence and more like a business. Put another way, you are in business
if you own rental property and are taxed like a regular business in
many ways.
For your rental property business, any rent payments
you receive from tenants will be considered your gross revenues. In
addition, revenues can include unreturned deposits, rent advancements
and expenses paid by a tenant. If you have to sue a tenant to evict
them, but recover a judgment for the remaining lease term, the judgment
is considered taxable revenues.
Tax deductions
associated with a rental property run along the lines of any business.
Any expense that is necessary to manage and maintain the property can be
deducted. This can include interest on mortgage payments, insurance,
cleaning, landscaping and so on. Because you are in business, expenses
can also include the cost of advertising for tenants, professional fees,
tenant finder fees, mileage driving to and from the property and
depreciation.
One huge rental property tax
advantage involves manipulating your equity. While a rental property
increases of decreases in value, you equity in the property is
inefficiently independent. For instance, assume your rental property is
worth $400,000 and you have $100,000 in equity. If the value increases
to $500,000, it does so because of market conditions, not the
manipulation of the equity. Put another way, the house would have
increased in value to $500,000 regardless of the amount of equity you
had in it. This stagnant equity creates opportunities for incredible
rental property tax advantages.
Known as a tax
reduction strategy, our goal is really three fold. First, we want to
protect against a loss of equity if the real estate market pulls back.
Second, we want to make our equity work for us in a no-risk scenario.
Third, we want to maximize rental property tax advantages. This is how
it is done.
First, we need to yank the equity out of the rental
property. This is typically done with a zero interest loan that produces
a monthly payment similar to your current payment. Next, the equity is
then invested in an investment grade insurance product tied to the stock
market. The insurance policy carries a cap wherein if the market has a
negative year, you will not lose money. With historical stock market
gains, you have now converted a non-growing rental property home into a
batch of money growing at eight percent a year. Moreover, if the real
estate market pulls back, you’ve protected equity that would otherwise
have been lost. These reasons alone make this a good strategy, but then
we have the rental property tax advantages.
Rental
property tax law makes this strategy extremely valuable. As you may
know, the loan payments on your rental property are completely tax
deductible. Depending on the relationship between your loan payments and
revenues from the property, this strategy effectively eliminates any
profit on your rental property business. While zeroing out your tax
bill, you are actually still growing money without any tax liability.
Yes, the equity you put into the insurance product grows tax free. This
is one of the great rental property tax advantages, to wit, converting
equity into tax-free growth while eliminating rental property taxes. If
you would like to learn more about this strategy, drop us an email and
we will get in touch.
Overall, the rental
property tax advantages should be fairly clear. Because it is a
business, you can write-off practically all of your associated costs. As
equity grows in the rental property, you can also convert the equity
into a tax-free growth vehicle.