If you ever mailed an envelope containing a monthly payment to a landlord, you qualify as a rent payer. What you might not realize is that the owner of that real estate is getting lots of deductions for expenses related to owning property.
When you own rental property, you may spend money on advertising. Promoting the vacant site, whether in small print ads in newsletters, newspapers, magazines and the Web, or in big signs and billboards, can be a necessary expense. It's also a deductible one. So are the expenses you incur to maintain your property in good condition.
When you own rental property, you may spend money on advertising. Promoting the vacant site, whether in small print ads in newsletters, newspapers, magazines and the Web, or in big signs and billboards, can be a necessary expense. It's also a deductible one. So are the expenses you incur to maintain your property in good condition.
Remember that because you are a rental property owner, the fees you pay related to that property can also be written off. For instance, if you pay a management company to collect rents and take care of your property, that cost can be subtracted on your tax return. Of course, every savvy real estate investor knows about the magic of depreciation. This is an expense that is really just a gift from the IRS to real estate investors. There is no out of pocket expense and everyone expects the property to increase in value. But the IRS still gives investors a deduction as if the property were decreasing in value. That's about the best kind of deduction you can get.
"Magic?" you're asking. "Isn't depreciation just a loss in value of my property? So how is this a good thing?" Simply put, depreciation is the biggest tax break for real estate investors - money in your pocket for things you already buy and there is minimum effort needed to collect on it. How does depreciation work? It is the distribution of the cost of a long-lived asset over the estimated life of that asset. In the case of a residential rental the time period is 27.5 years. You may deduct 3.636% (1/27.5) of the purchase price each year. This will be a steady deduction over the life of this property.
Sometimes we desire to speed up the process of depreciation to put more money in our pockets. In the case of land improvements or personal property also called "chattels" the life span can be as short as 15 all the way down to 5 years. Appliances, cabinets and carpets are all examples of things that depreciate over 5 years. A $1,000 refrigerator yields roughly 20% or $200 in depreciation each year. Total this up over all your personal property and just like magic money comes rolling back to you.
Now that you know what depreciation can do for you, I'm sure you'd like to know how to do it. Chattel Appraisal is a strategy to separate out land improvements and personal property components from the real property owned. You must be careful not to value the land too high or too low, make sure you are depreciating the property over the right period of time, and verify you are utilizing the right foundation for depreciation (many will use a basis that is too low, missing out on $$$.) These are all things you can do yourself - simple, but time consuming. Now that you know the wonders depreciation can do for you, get out there and make some magic!
Now if you are a business owner, the rental fees you pay to support your business should be recognized. Your business may work out of rented space. If so, the cost of the location is deductible. So are any property taxes you may pay for the landlord as part of the lease. Maybe your business has a parking facility that you rent. If so, the same rule applies.
Perhaps your business requires storage of goods. If you are renting warehouse space don't forget to deduct the fee. Even storage of a much smaller kinda safety deposit box that contains business-related papersqualifies.
Paying rent is usually a part of being both a real estate and a business owner. Make it work for you.
Warmest Regards,
Tom
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