Tax Time for Lake Forest, California Real Estate Investors

With tax season fast approaching and April 15th around the corner, we figured it would be appropriate to discuss the significant tax benefits that accompany real estate ownership.  Remember when filing your return to take full advantage of the following:

Mortgage Interest Expense
The government allows all of the interest associated with the financing of the property to be written off as an expense of owning the property.  For many real estate investors, especially those with interest only loans, this expense deduction can be substantial.

Depreciation
Depreciation is a method for matching the costs of acquiring property over the properties estimated economic life. The IRS now requires that most properties be depreciated using the straight-line method of depreciation (27.5 years for residential properties, 39 years for commercial properties).  Depreciation will act as an intangible expense and will shelter income from taxes.

Expense Deductions
Many of the costs associated with owning and managing a real estate investment, such as management fees and insurance premiums, are deductible.  One deductible expense worthy of note is the travel expense.  Many real estate investors acquire real estate in places they like to (or have to) visit, and each time they travel to the property, the travel costs are a deductible expense.  Not a bad deal if the property happens to be in Maui or around the corner from a relative.

Passive Losses
Due to depreciation and expense deductions, it is possible to own a property that is producing positive cash flow, but for tax purposes showing a loss.  These “passive losses” are subject to certain restrictions, but in many circumstances can be used to offset passive income from another investment.  In the event an investor qualifies as a “full time real estate professional” passive losses can be used to offset ordinary income.  Full time real estate agents should have no problem qualifying for maximum passive loss benefits (see recent US tax court opinion).  

This information came to me by email from Sandra Hartness, 1031 Assett Manager –www.assetservicesinc.com.  Please consult your own tax specialist for information specific to your tax situation.

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