Rental property tax deductions add money to the bottom line.Rental property tax deductions are allowed because by renting houses and apartments to people, the basic need for shelter is resolved, one tenant at a time. This is a big service to society. The government cannot do it efficiently, so, it is giving us, the entrepreneurs, all the initiatives and advantages through rental property tax to do it. We are glad to have rental property tax deductions.
Real estate is unique because it is the only investment that allows you to shelter income and reduce your income taxes using depreciation. What is the Depreciation?We do not write/talk about the depreciation as the decline in value due to wear and tear, adverse changes in the neighborhood, or any other reason. Here the Depreciation is a tax term.Depreciation is the annual deduction allowed to recover the cost or other basis of business or investment property having a substantially useful life beyond the tax year. Depreciation starts when you first use the property in your business or for the production of income. For residential investments the useful life or recovery period is 27.5 years and for commercial properties is 39 years.
How to calculate asset depreciation?
We need The
Accounting for Real Estate
page to define a few more tax terms like "
Net Income
after tax" where the depreciation finally creates a passive loss.
The mistery of Passive Losses.According to the Internal Revenue Code (IRC), a passive loss is one incurred from a passive activity. A passive activity is a trade or a business that generates income for a taxpayer who does not materially participate in the trade on business. Income generated by a passive activity is called passive income. Examples of passive income include dividends, interest and rents. It sounds impressive, but it is not so bad. The rents collected in the real estate business are Passive Income and the financial activity may end, most of the time, with a passive loss. Since the 1986 Tax Reform Act, the amount of passive losses from real estate passive income is limited to $25,000. But if you are a
Real Estate Professional
then you can offset unlimited losses from passive income against an earned (job) or portfolio (stocks) income.
So far so good. All the tax advantages bring us to the conclusion that: investing in income producing properties is the practical and the better alternative to the stock market because of the "get rich" rules of the game. For more information, go to Diane Kennedy, the author of "Real Estate Loop-Holes - Secrets of Successful Real Estate Investing" To achieve your financial goals you need a good tax accountant, unless you decide to become an income tax specialist and real estate tax knowledgeable, as I did myself. Receive monthly real life Tips.
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