Tax Advantages of Rental Property

The tax advantages of rental property ownership are perhaps the greatest wealth generators real estate investors enjoy; but they they tend to be under discussed. 

Read the video transcript here:

Hi, I’m Joe White and this is the Grow Real Estate Investing Podcast

Last podcast I began explaining why real estate investing has such big advantages over other forms of investing, like the stock market. 

We began with the powerful dynamic of Leverage.

Leverage alone blows other forms of investing out of the water. And it's a very big, very exciting mechanism real estate investors use;

but like most things real estate investing-related - it's also a very simple concept & easy to implement.

Definitely check out that podcast & the article guide.  I’ll post the link in the notes here for you.

Today, I want to talk about a 2nd super power that real estate investors have over other types of investors and that is the Tax Advantages.

So just then, when I said “tax advantages”, everyone watching or listening, just moaned. I can feel it.

Now Tax Advantages might not be flashy; but it's an even stronger wealth generator than the exciting power of Leverage.  

Think Tax Advantages as Leverage’s quiet, smart older brother, here in the real estate investing family.

The power behind real estate investing is - bottomline, that the government wants you to invest in real estate. Our economy is built upon you buying real estate & they will give you a big pile of rewards if you do it.

In fact, our government wants you to invest in real estate so much, that the laws are set up for real estate investors to avoid taxes all together.  

So, Tax Advantages is like the quiet, booksmart older brother?

I say that because tax advantages might be big wealth generators; but they still fly under the radar - even though the advantages are considerable, and come with very big returns.

So big that on their own, Tax Advantages make real estate investing well worth it, and beat all over other forms of investing.

But tax advantages run under the radar because most of us don’t see tax as something that we should owe.... Rather we feel that someone is taking our hard earned money.  So when we somehow magically don’t have to pay tax, we tend to not appreciate the fact as much as we should.

Leverage might be the flashy little brother, that catches our eye.

He’s driving the sports car with his bold exciting earnings. While Tax Advantages is like the brother with his face in the ledger, always crunching the numbers. 

He’s the one you should have married.   He’s the one your mom wanted you to marry. But you went after the sport car.

And that’s okay….. Leverage is no slacker.  And he also a whole lot of fun.

But even when we hear investors talk about the huge wealth super power that tax advantages offers us,  their tone isn’t all that excited.

Many of us use these tax advantages…. but few of us truly appreciate them.

Given the benefits, we really should…... because this is a crazy amount of money, and a very nice ROI. 

So, what are the Tax Advantages of investing in real estate?

1st, I’m not an accountant, I’m not a financial advisor, I’m not an attorney. I’m not a doctor nor an Amish Baker. I’m just a real estate investor who thinks he knows stuff.

Talk to them. They will make you money. They will cost you far less than they will make you.

1st Deductions.
Real estate investing is a business.
If you own just one rental property, the IRS will see you as being in a business.

And that gives you the ability to deduct expenses relating to that business:

The tax, the insurance, the mortgage interest, the operating expenses, the all the repairs, the fees to manage the property,....basically anything needed to manage the property.

Milage, paper, pens, the percentage that you use your home for an office, your internet, your cell phone, so on -  are all tax deductions to this business.

Next There Is Depreciation

Depreciation is where the government acknowledges that things in your rental property are going to eventually break.     So they pay you for that upfront each year - even though they already paid you for those things as business deductions.   So these are phantom expenses.
You are actually getting paid twice. So at this point the government is paying you!

3rd - There is No Fica, No Self Employment Tax:

Real estate earnings aren’t generally taxed as earned income, like a 9-5 job.

So there isn’t the 15.3% tax that you and your employer share,
So add another 7.65% on to this tax benefit pile. 

4th is Refinancing... or what I like to call Tax Free Borrowing.

Say you borrow $100k to buy a distressed property....That costs you $50k to buy, and another $50K to do strategic improvements, to make it now worth $200K.

You can refinance the property, pay back the $100k that you owe, and take an extra as $75k income….. Tax Free. 

Next is the Capital Gains
Long term Capital Gains or Short Term Capital Gains are the tax you pay when a property is sold. If you are a buy & hold investor, with rental property, this isn’t really much of a concern for you. That’s why we love rentals.

But if you are planning on selling the property, there is a mechanism in place called the 1031 Exchange that will help you defer paying taxes. Again, the government is trying to reward you for investing in real estate and building the economy. Done right this can be avoid tax indefinitely.  Lets say…..after you die!

1031 Exchanges are interesting enough that we’ll save that for another podcast and its own article guide.

SO. The 1st reason that that real estate investing beats over other forms of investing is Leverage and the 2nd is that most rental property owners, don’t pay tax on their rental income.

Think about that for a moment....
maybe think about it when you are opening up your next work paycheck.

Take a moment to look at all that tax that was taken out of that check before it touched your hands.   And then ponder if you think the tax advantages of real estate investing catches your eye.

Those of you that  already own an investment property.
The next time you are racing down the highway, in your sport car that Leverage bought you, take a moment to think about his older brother.

Happy investing everyone!


Joe White

Joe White is a Philadelphia Property Manager and Real Estate Broker. He is the owner of Grow Property Management and has been involved in the management, sales and purchases of Philadelphia area rental investment properties since 2008. He is an author and works as a real estate investment consultant and construction manager.

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