I don't know of any investment vehicle that can compete with the great tax deductions that rental real estate investors enjoy. Rental real estate investors get to deduct insurance, advertising, repairs, interest expenses, property taxes and depreciation of buildings and appliances. On a $100,000 home in a Dallas area suburb, tax deductions are roughly $10,000 on an 80% loan, just including taxes, mortgage interest, insurance and depreciation.
Below are a few additional real estate tips to help reduce your income tax liability.
1. Rent deposits should not be counted as income if you plan on deducting that money back to the tenants at the end of the lease.
2. On the sale of your rental property held for more than a year, you'll only pay capital gains - or 15%, versus the regular income tax rates (that are likely to head higher). You should also deduct commissions, title charges, recording and transfer charges, and settlement costs.
3. The costs of building your own property web site, as long as it's an ordinary and necessary advertising expense is deductible. Others include newspaper ads, signs, banners, and postage for direct mail.
4. Sell your homestead to yourself with a S-corporation. With this method, you are able to satisfy the requirement of occupying a home 2 out of the last 5 years to avoid paying capital gains. Say for example, you wanted to rent out your previous home to tenants for a long time period. Well, you could simply set up your own S-corporation and have it buy the home from you personally, and book the profits tax-free - as long as you've lived in the home 2 out of the last 5 years.
5. Refinancing your rentals. Once your rental home has appreciated in value or you've paid down the loan quite a bit, you can refinance the home at a higher loan amount, pay off the old loan, and put the excess cash in your pocket, tax-free. Of course, you'll have to pay closing costs associated with the new loan, but it's free income.
If you have multiple homes, you might consider refinancing into a portfolio loan. A portfolio loan would include multiple properties on one loan and could make it easier to qualify for additional fannie mae and freddie mac mortgages.
Lastly, there's never been a better to buy rental real estate. Foreclosures have subsided but are expected to swell sharply in late 2012. At the same time, mortgage rates are at an all-time low. Plus, ask any landlord, the rental business is booming! And real estate is a great hedge against a weak dollar and inflation, which is sure to surface sooner or later as Helicopter Ben has printed trillion$ with a "t". In fact, farm and rural land prices are setting new records in many parts of the country, right now!
Just remember, studying and learning will not get you to the promised land. You've got to take action. As they say, words without deeds is dead. I'd love to help you if I can, as I've been buying, fixing and renting Dallas area foreclosures since 2005. You can usually catch me on my cell at 214.690.9682. Best of luck!
Troy Corman is the founder of t2 Real Estate LLC, a Dallas real estate firm providing specialized knowledge with a hands-on approach. Specialties include residential real estate brokerage, land and acreage, and commercial real estate services. Contact us today at 214.827.1200 if you need to sell, buy or get your DFW property leased.