Owning rental property is a great wealth building tool. Less well known is the fact there are also rental property tax advantages.
Rental Property Tax Advantages
For tax purposes, rental property is handled less like your primary residence and more like a business. Put another way, you are in business if you own rental property and are taxed like a regular business in many ways.
For your rental property business, any rent payments you receive from tenants will be considered your gross revenues. In addition, revenues can include unreturned deposits, rent advancements and expenses paid by a tenant. If you have to sue a tenant to evict them, but recover a judgment for the remaining lease term, the judgment is considered taxable revenues.
Tax deductions associated with a rental property run along the lines of any business. Any expense that is necessary to manage and maintain the property can be deducted. This can include interest on mortgage payments, insurance, cleaning, landscaping and so on. Because you are in business, expenses can also include the cost of advertising for tenants, professional fees, tenant finder fees, mileage driving to and from the property and depreciation.
One huge rental property tax advantage involves manipulating your equity. While a rental property increases of decreases in value, you equity in the property is inefficiently independent. For instance, assume your rental property is worth $400,000 and you have $100,000 in equity. If the value increases to $500,000, it does so because of market conditions, not the manipulation of the equity. Put another way, the house would have increased in value to $500,000 regardless of the amount of equity you had in it. This stagnant equity creates opportunities for incredible rental property tax advantages.
Known as a tax reduction strategy, our goal is really three fold. First, we want to protect against a loss of equity if the real estate market pulls back. Second, we want to make our equity work for us in a no-risk scenario. Third, we want to maximize rental property tax advantages. This is how it is done.
First, we need to yank the equity out of the rental property. This is typically done with a zero interest loan that produces a monthly payment similar to your current payment. Next, the equity is then invested in an investment grade insurance product tied to the stock market. The insurance policy carries a cap wherein if the market has a negative year, you will not lose money. With historical stock market gains, you have now converted a non-growing rental property home into a batch of money growing at eight percent a year. Moreover, if the real estate market pulls back, you’ve protected equity that would otherwise have been lost. These reasons alone make this a good strategy, but then we have the rental property tax advantages.
Rental property tax law makes this strategy extremely valuable. As you may know, the loan payments on your rental property are completely tax deductible. Depending on the relationship between your loan payments and revenues from the property, this strategy effectively eliminates any profit on your rental property business. While zeroing out your tax bill, you are actually still growing money without any tax liability. Yes, the equity you put into the insurance product grows tax free. This is one of the great rental property tax advantages, to wit, converting equity into tax-free growth while eliminating rental property taxes. If you would like to learn more about this strategy, drop us an email and we will get in touch.
Overall, the rental property tax advantages should be fairly clear. Because it is a business, you can write-off practically all of your associated costs. As equity grows in the rental property, you can also convert the equity into a tax-free growth vehicle.