- Individuals who purchase real estate rental properties, who actively participate in the decision making process, such as determining who the tenants will be and what repairs should be made, may be able to reduce their taxable income by up to $25,000 per year under existing tax taws. The active real estate investor may deduct up to $25,000 per year on schedule E for such items as depreciation, negative cash flow, maintenance, repairs, interest, taxes, and trips to the property. This could effectively reduce the investor's taxable income by as much as $25,000. The potential savings in the 28% bracket would be $7,000. An investor in the 31% tax bracket would save $7,750. The savings would even be greater if the investor has a state income tax, as most state income taxes are based on the federal tax returns, which would be reduced also.
- The $25,000 annual tax deduction is the maximum allowable each year no maker how many Investment properties are owned; this amount is reduced for taxpayers who have over $100,000 in adjusted gross Income. For every $2,000 over $100,000 of adjusted gross income, the $25,000 limit is reduced by $1,000. If, for example, the investor's adjusted gross income was $1 10,000, he would only be entitled to a maximum of $20.000 per year. The entire $25,000 would be eliminated for the investor who has an adjusted gross income of $150,000. Hence, these investors would be buying the real estate investments for the potential appreciation and/or income which they can generate.
- Real estate investment property is a field where a substantial number of existing homeowners could be sold on the idea of purchasing rental real estate if shown by their real estate agent how to obtain good rental properties. In fact, hundreds of people each day purchase tape courses from late night infomercials, showing them how to purchase rental properties with little or no money down. The purchasers of those courses are shown that buying real estate investments can help generate large monthly incomes, build huge net worth's and shelter taxes. Some of the participants end up quitting their jobs, as they can earn substantially more from buying rental properties than what they have been doing. As mentioned above, this is a focus area of business for the HBH group. We have the expertise in acquisition and management services of rental property. Don't rely on late night TV to "buy" some, not all of the knowledge you need, instead leverage our experience to your advantage!
- One age old objection to owning real estate investment properties is dealing with tenants. That is, collecting the rent each month and having to locate new tenants to replace the old ones. There are several ways to deal with this. First, consider having a company such as HBH Management manage your properties for a small monthly fee. We can also lease manage the properties for you, finding you good, qualified tenants and managing all interactions with those tenants; you simply pick up your check from your mailbox! Another option is to purchase real estate as co-owner with a relative. One relative can act as the owner-occupant/tenant. The other relative can act as the owner-investor. Each party would own a percentage of the property, such as WSO. The owner-occupant relative would put up 50% of the down payment, pay 50% of the mortgages payment and pay a rent payment to the owner-investor to offset the owner-investor's 50% of the mortgage payment. This arrangement reduces the owner-occupant's cash outlay, helps him qualify and will allow him to purchase a nicer home than he could afford on his own. The owner-investor gets the same tax deductions he would if he had purchased a rental property, but he has a permanent tenant, his own relative, who will eventually buy him out. But as an active real estate investor, they may be entitled to up to $25,000 in yearly deductions.
- Another derivation of this idea is for parents to purchase condos or townhomes for their college age children when they go off to college. The parent can then employ the child as a property manager for their investment, pay them a salary (tax deductable) which can be used to pay their tuition and books.
Of course, The HBH Group can't give you tax advice, just ideas to discuss with your CPA, so please consult a tax professional regarding these ideas before putting your plans into action. Or feel free to call us and set up an appointment and we can connect you with reliable tax professionals to assist you in making a plan to shelter income through real estate investments.