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Tax benefits and incentives for real estate investments maximize the value of our income. Real estate investment can also be financed profitably in many cases. As complicated as it may be, 3 fundamental principles form the basis for these benefits: 1. Acquisition of
real estate properties are usually paid with pretax money. Because tax laws are ever changing, the
services of a good accountant is imperative to ensure full benefits of
these tax laws. The fees charged by a good accountant is usually
insignificant compared to the money they can save you. Computer software
such as Turbo Tax are designed to make tax filing easier, not necessarily
more cost effective. One thing you can count on--no one can tell you if
you're missing out on tax deduction or exemption, except a
good tax accountant. Real
estate investments can be categorized into 4 main types: |
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| Owner occupied homes Current law permits certain tax deductions resulting from the cost of purchasing a primary residence and a second one such as a vacation home. Tax deductible mortgage interests typically make it more beneficial to itemize deductions on our tax return instead of taking the standard deductions allowed. This opens the door to a host of other deductions we may be able to take advantage of. Simply put, we have more spendable income when we pay less tax for each dollar gained. Many renters overlook the fact that the true cost of home ownership is not the amount of your monthly payment. While owning a home means monthly mortgage payments, property tax, property insurance & repair/maintenance combined, it also means income tax savings incentives that can offset much of these costs. Appreciation of property value is another great incentive for owning a home. Whether one should rent or buy (from a financial viewpoint) ultimately depends on the tax profile of the individual. When in doubt, talk to professionals like accountants and financial planners. Another huge tax benefit is the savings derived from the capital gain tax exemption when we sell our owner occupied homes. Until the law is changed, the first $250,000 of profit is tax free for a single person and $500,000 for married couple. Since tax-free profit benefits the rich and the poor (including legislators), it's not likely to be repealed. (Consult your tax accountant for current laws). Lenders also offer the best financing terms for this type of property making it the least expensive form of mortgage. This is why many investors look for residences that qualify for this type of loan that can also be rented out to help with the mortgage. (Examples: duplex, triplex, homes with separate guest house, etc.) |
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| Non-owner occupied
residential properties Beginning with the 3rd residential property you purchase, lenders rate go up and tax laws regarding allowable deductions and profits are different. This type of property includes 1-4 units dwellings. This is a popular type of rental income property. It's relatively easy to manage tenants and physical maintenance. More units also provide a steadier income stream. The cost of acquisition per unit is typically less as well. |
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| Commercial properties There are 2 types of commercial properties: residential & businesses. Residential include apartment complexes of more than 4 units while businesses includes retail store, professional and industrial building, strip mall, and mixed use properties. Investments required are much greater and lenders are less willing to lend much more than 50-60% of the selling price. While the risk are greater, the benefits are also greater. Sound investment of this type can yield substantial profit. |
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| REIT (Real Estate
Investment Trust) Instead of investing in specific properties, one can also invest in companies that build, lease, sell and manage various types of real estate. For the most part, this is more like stocks and bonds investments. Many large investors are involved in this sector of real estate investments but opportunities exist for small investors as well.
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