Investing in real estate makes you eligible for some attractive tax deductions for rental properties. Now I always say that real estate investments are the best type of investment that you can make. They aren’t a get-rich-quick scheme but a sure and steady way to secure your financial future, your kid’s education, your retirement, and more. Rental income from your investment will help repay the loan you’ve taken to finance the home. Plus, these investments are eligible for some very attractive tax breaks. I would say surprising tax breaks, but it isn’t all that surprising as I explain in my latest podcast. Read on to know more.
We can say these tax breaks are surprising because they are quite generous and beneficial. However, when we really think about it, this isn’t surprising. Think about all the people sitting in Congress – most of our lawmakers are rich property owners themselves. So it isn’t all that surprising that they are willing to give tax breaks to other wealthy property owners. And guess what? When you start investing in real estate, you too become one of those property owners and you also become eligible for those tax breaks!
When you buy rental homes, you enjoy tax deductions for rental properties. You receive the benefit of depreciation. This is something I call a phantom loss since houses don't depreciate the same way that say, a car does. The authorities offer tax deductions based on the depreciation of machines because regular wear and tear erodes the worth, and over time reduces it to zero or close to it. For instance, a brand-new car is seen to lose value practically the minute you drive it off the lot.
However, this is not the case with homes because they actually appreciate with time. If they don't actually increase in value, they do at least keep up with inflation even as they earn you a passive income. So, we may not actually need this tax cut but we do in fact get it, and this is a significant benefit. The depreciation amount lowers the total tax you owe. This can mean a lot for people whose salary is at a certain threshold.
Then there are tax deductions for rental property benefits that accrue to the heirs of property owners in the eventuality of the owner's death. Here in the United States, we have something called the Step Up (or stepped up) basis. Not to go too much into the complicated way this thing works, but the simple fact is that this rule helps reduce the taxable capital gains income if the heirs of the deceased property owner sell the inherited property. So here again, there is a significant benefit that essentially lets your heirs sell off the property with zero taxes.
So to sum up, real estate investments can and do give you the opportunity to create wealth and financial security for you and your family's future. When you invest in rental homes, you also receive tax breaks that further sweeten the deal. The government gives you these tax breaks, so why not take advantage of them?
To know more about real estate investing and tax deductions for rental properties, tune in to my YouTube channel. If you have a question about real estate investing, give us a call. At ICG Real Estate, we are happy to help in any way possible.