Tax Benefits of Real Estate

Owning real estate is far more than just having a property that spits out monthly profits, it is rather the tax advantages to owning property that make it unique to almost any other investment option out there. 

Owning real estate is far more than just having a property that spits out monthly profits, it is rather the tax advantages to owning property that make it unique to almost any other investment option out there. 

The way cash can be generated through property should not solely focus on the monthly rental income, because profit can be calculated in so many other ways. An investor can make money each month through rent, but on paper be operating at a loss – canceling out any tax obligation of owning said property.

Mortgage Interest Write Off

One of the more favored tax benefits from real estate investors. Imagine having a $500,000 mortgage and a property and you pay 4% interest per year, which amounts to paying $20,000 in annual interest. 

You can take that interest and write it against either your own taxable income on a primary residence or against any rental income you receive. If you apply this to a principal residence capped at the first $750,00 of a mortgage or if you have a rental property it makes no difference if you have a $200,000 mortgage or $5,000,000 mortgage – because that’s an expense against your rental income.

How to Save

By using the $500,000 example, let’s say you are grossing $50,000 per year in rent. Then subtract $20,000 interest paid and the revised gross amount on that property would now be $30,000 per year.

This effectively lowers the mortgage interest amount that you would usually be taxed at.

So let’s say on a primary residence you’re paying $20,000 per year in mortgage interest and you’re in a 25% tax bracket. That means you can deduct that $20k off of your income and essentially save around $5,000 in taxes if you’re in a 25% tax bracket.

This means effectively what you’re paying instead of 4% is around 3% per year because it’s classed as a write-off. This is a huge advantage of owning real estate and then leveraging your money on top.

Smart Investing

Leveraging your money in real estate is one of the unique reasons why real estate is such a solid investment long term. This way of leveraging is much different to margin and stock trading with high risks and exposure. It almost always makes sense to leverage money in real estate if you can get a long-term loan at a low-interest rate.

Start planning a better future by saving on taxes and building a real estate portfolio.

Please reach out to us at Startup Tandem with any questions you may have. We look forward to hearing from you.

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