Profiting From Real Estate Investments

An Investor Newsletter From HomeVestors Of America, Inc.

By Marcie Geffner / Vol. 3 No. 10 
11/21/2008

Did you know: Raising rents and cutting costs aren't the only ways to maximum your return on your rental properties? There is also another way, that is to take advantage of income tax perks that come with rental property ownership.

Here's an overview:

Revenues. Rents, fees paid by tenants, lease-cancellation receipts and other revenues related to the use or occupancy of your property are considered taxable income. But security and pet deposits and other sums that belong to your tenants aren't considered taxable income unless they're forfeited when the tenants move out. That means you shouldn't owe income tax on those deposits as long as they are to be returned.

Expenses. Rental property owners can deduct operating costs related to their property. Examples include: mortgage interest; repairs and maintenance; janitorial and office supplies; lawn care services; trash collection fees; utilities; locks, keys and locksmith services; mileage and other transportation costs; losses due to natural disaster, fire or theft; insurance premiums; property taxes; advertising costs; and legal, accounting and property management fees.

Certain other expenses, such as a loss of rental income when the property is vacant or improvements that are beyond normal repairs and maintenance, can't be deducted, though the latter can be depreciated.

Depreciation. Major improvements typically can be depreciated over a number of years, and the depreciation may be tax-deductible. What's more, the value of the property, exclusive of the land, also can be depreciated and tax-deducted over a number of years.

Found deductions and depreciation can be a big boost to the return on your investment. A savvy tax accountant who's familiar with rental property tax issues should be able to help you identify and take all the deductions and depreciation to which you're entitled.

One caveat: If you don't materially participate in the management of your property and your investment generates a loss, you may be subject to special passive-loss rules. 'Materially participate' is a technical term that's defined by the IRS, so you should consult a tax professional if you believe these rules might apply to your situation.

Disposition. The profitable sale of investment property typically triggers capital gains tax. But property owners can use an installment sale or Sec. 1031 exchange to manage how they recognize capital gains. An installment sale stretches out the capital gains over a number of years while a so-called 'Starker' exchange of like-kind investment property defers payment of capital gains taxes. These strategies offer considerable advantages, but the rules are complicated and must be followed exactly. Be sure to consult a exchange accommodator before you sell your investment property.

The Internal Revenue Service offers several tax-law booklets for rental property owners. Among the must-reads are: Publication 527: Residential Rental Property; Publication 925, Passive Activity and At-Risk Rules; Publication 537, Installment Sales, and Publication 544, Sales and Other Dispositions of Assets. These publications may be found on the IRS website, www.irs.gov.

Copyright 2008, HomeVestors of America, Inc. All rights reserved. No part of this article may be used or reproduced in any manner whatsoever without written permission of the author.


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HomeVestors of America

HomeVestors, the 'We Buy Ugly Houses' company, is now in 35 states and has more than 270 franchise offices. Learn more about owning a HomeVestors franchise by registering for our Webinar, held each Tuesday at 4 pm CST. Register at www.homevestors.com, then click on the Buy A Franchise icon, then click on the Webinar/Seminar tab.

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