Tax shelter is one of the returns associated with real estate investment that benefits income property ownership,carrera occhiali. Thanks to the tax shelter benefits provided by the tax code, a real estate investment can shelter some of its own income from taxation and occasionally shelter income received from other investment sources as well.
In this article we will explore two allowable deductions for real estate investment properties that provide tax shelter,carrera lunettes.
A deduction for mortgage interest is the first. The IRS allows you to deduct the interest you pay on the mortgage you The benefit to real estate investors is that interest is really a cost associated with acquisition of property rather than operating it,chanel pas cher, and some would argue that tenants really pay the mortgage interest for the real estate investor,carrera lunettes.
The second source of tax shelter is through depreciation deduction,boutique lunette carrera.. The IRS allows you to assume that the buildings (not the land) are wearing out over time and becoming less valuable and as such, permit a deduction for that presumed decline in the value of the asset,puma pas cher.
Okay,oakley crowbar, but here’s what’s really great about real estate depreciation,chaussures puma ferrari.
Depreciation is a non-cash tax shelter deduction,sac chanel pas cher. In full compliance with the tax code,oakley pas cher, you get a deduction that is not an operating expense and therefore does not affect your cash flow,longchamp milano. Moreover,chaussures puma, depreciation can shield some or all of your property’s year-to-year income from taxation and in some cases when the depreciation deduction is large enough, it can even exceed the amount needed to shelter the property’s own income and provide tax shelter for other investment income as well,ray ban lunettes.
A simple formula for the tax shelter component of real estate investment property doesn’t exist,ray ban pas cher, but here’s the idea,puma pas cher.
Income less Operating Expenses = Net Operating Income
Then,polo ralph lauren,
Net Operating Income less Mortgage Interest less Depreciation (Cost Recovery) = Taxable Income
EXAMPLE: Let’s say you own an apartment building that generates rental income of $48,chaussures puma,000 and operating expenses of $19,lunette oakley,200 thereby leaving a net operating income of $28,polo ralph lauren outlet,800,lunette carrera.
Okay, to calculate you taxable income, you will deduct your mortgage interest and allowable depreciation from the net operating income,boutique chanel.
Remember,lunette oakley, most mortgage payments consist of principal and interest, but only the interest portion of the mortgage payment is deductible. For our example,ray ban wayfarer, we’ll say that mortgage interest is $17,559,ray ban soldes.
The amount of depreciation depends on several factors: the useful life of the buildings as specified in the tax code and the percent of the investment real estate allocated to buildings and land,sac chanel. Useful life is currently 27,lunettes chanel.5 years for residential property and 39 years for nonresidential property,oakley discount, and only buildings can be depreciated. For simplicity, we’ll say that our deductible amount for depreciation is $10,polo ralph lauren outlet,037.
Here’s the calculation: $28,800 17,polo ralph lauren,559 10,037 = $1,204. The result is that you must pay Federal income tax on a taxable income of $1,longchamp outlet,204 (which is a whole lot less than you would have had without the tax shelter benefits, and thereby one of the great benefits associated with rental property ownership
Deductions for mortgage interest and property depreciation are the biggest tax shelter returns, but just so you know,puma golf, there are other components to tax shelter,occhiali carrera champion. For instance, you can typically depreciate capital additions over the same useful life of the property, starting when they are placed in service,ray ban lunettes. You are also allowed to amortize closing costs associated with the acquisition of investment real estate over the same useful life,oakley pas cher, as well as loan points amortized over the number of months of the loan term,longchamp borse.
You get the idea,ray ban pas cher.
The elements of tax shelter associated with real estate investing really can benefit income property owners,carrera online. If you aren’t yet investing,lunette carrera magasins, perhaps this article will encourage you to get started,lunette carrera. Here’s to your real estate investing success.
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