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A Crash Course on Rental Property Tax

October 27, 2012 by Marco Santarelli

One way or another, Uncle Sam is going to get his cut. Count on it. And so will your state and local governments. That said, as you file taxes there are certain things you can do as a real estate investor to help manage your tax bill, and maximize your after-tax return on your investment.

In order to do so, however, you need to understand the primary ways in which investment real estate portfolios get taxed. You must also have a general grasp of some abstract concepts like calculating your tax basis, as well as the depreciation of capital investments. Hey, if this stuff were easy, we’d all be CPAs, right?

Warning: This article will only arm you with enough information to be dangerous. You can click on any of the links for more detailed information directly from the Internal Revenue Service. This article won't make you an expert. But you can become conversant with the basic terminology, so you can be better prepared for a meeting with your tax advisor.

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Filed Under: Financing, Real Estate Investing, Real Estate Investments, Taxes Tagged With: 1031 Exchange, Amortization, Capital Gains, Capital Gains Tax, Depreciation, Passive Activity Rules, Property Tax, Real Estate Investing, Real Estate Tax, Real Estate Tax Deductions, Real Estate Taxes, Rental Income, Rental Property Tax, Tax Deductions

Understanding the Tax Advantages of Depreciation

July 11, 2011 by Marco Santarelli

There's no doubt about it – one of the greatest benefits of real estate investment are the tax benefits the investor receives!  It's entirely legal to shelter income and defer capital gains.  It's entirely legal to minimize taxation and maximize the money the investor keeps on an after-tax basis.

The concept of depreciation (also known as cost recovery) operates on the assumption that physical assets lose an equal amount of value each year due to wear and tear. Another term for this is “non-cash expense.”  In other words, it doesn't really take any cash out of the investor's pocket.  However, it's treated like an expense or deduction when adding up your income.

And the investor gets a great result from this concept – it decreases taxable income and, as a result, lets the investor shelter positive cash flow from taxation. In other words, depreciation (cost recovery) lowers income taxes for the current year and defers them to a later date.

Keep in mind that cost recovery or depreciation does not eliminate income taxes. In technical terms, an annual depreciation deduction is figured on a reduction in basis of the property. This is calculated as the investor’s original cost in the property plus capital improvements. This is then recaptured (added to the investor’s taxable profit) in full and taxed upon disposition or sale.

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Filed Under: Real Estate Investing, Taxes Tagged With: Cost Recovery, Depreciation, Real Estate Investing, Real Estate Tax Deductions, Real Estate Taxes, Tax Advantages

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