landlord/ Investor

Real Estate Agent with Taking a break


Its seems that everyone is talking about buying real estate as an investment. Some are looking for flipping the properties and others are looking for investment income.

Being a  landlord has some significant tax advantages that have been put in place by the  IRS and is the reason why people have made great money in real estate.

Some of the Downsides would be dealing with the Tenants. Another would be buying property in hopes to sell, putting too much money into the remodel and then having to try and sell it in a softer Real Estate market. Another problem that could come up is dealing with commercial loans on bigger units and possibly jumbo loans. This always adds another obstacle into the scenario. I suggest that first time investors work with the smaller units to start and avoid the jumbo loans with their first investment.

You Can deduct mortgage interest and real estate taxes on rental properties. If you pay mortgage points, you must amortize them over the term of the loan (unlike points on a mortgage to purchase a principal residence, which can be deducted immediately). You can also write off all other operating expenses - like utilities, insurance, homeowner association fees, repairs and maintenance, yard care and so forth. If you have a property that you intend to flip, you can write off all the upgrades and repairs that you have done, the labor used for the work and all the fee's that you have accrued doing the transition.

You are allowed to depreciate the cost of residential buildings over 27.5 years. As your investments add up this creates a wonderful way to shelter money. Commercial buildings must be depreciated over a much longer period of  39 years, but the write-offs will still shelter some cash flow from taxes.

Keep a good eye on your AGI (annual gross Income) and PAL (passive activity loss). Many hire out companies to manage their Properties, such as vacation rentals or condos. It is less likely that you will be able to take the full $25,000 a year allowed by the IRS if you have a management company involved, as a rule you will be able only to take 50% up to 50% of the loss. Also it is very important to keep an eye on your AGI If your making $150 then the rule does not apply and at $125K you only are allowed 50% of the max write up to $12,500.

Something to keep in mind with the positive taxable income from rental real estate or investment real estate is that you pay no self-employment tax, or SE, tax, Depending on your situation, the SE tax can be either 15.3% or 2.9%. Being self employed since I was 21, I can say that this is a wonderful benefit and is money in your pocket.

Another thing to keep in mind is long term capital gains, but that is another blog.

Investment and rental income property is a great way to create wealth, but it must be approached with some thought and wisdom. You don't jump in a pool if you can't swim and don't know how deep the water is. Not everyone is going to have a life guard to get them out if things go worng.