Last week, two local, successful businessmen asked to meet with me.
After learning of President Obama’s (and the Democrats in Congress) plan to dramatically increase taxes for the purpose of stealing money from America’s achievers and giving it America’s parasites, they had some questions about the tax benefits that come with owning rental property.
After our meeting, I realized that there are probably a good number of business owners who may suddenly be very interested in sheltering their hard-earned income from the steal-every-cent-they-can politicians.
Normally, when people think about rental property, they only think about the perceived negatives – tenants destroying the property, not paying their rent on time, etc.
Most folks fail to realize all the advantages that come with owning rental property. First and foremost, you have an appreciating asset for which someone else (the tenant) is paying. In addition, because the government is such a terrible landlord – look at any government housing project – they pay (through tax incentives) hard-working citizens to provide housing to folks who would otherwise be homeless. These hard-working citizens are called real estate investors!
What types of tax incentives are offered to these investors?
First, you are able to deduct the mortgage interest.
Second, you are able to depreciate the property over 27.5 years – even though, in most cases, the property actually increases in value.
Third, the net profits are taxed as ordinary income – not earned income!
Fourth, you are able to write off all repairs made to the property.
Fifth, you are able to write off all improvements you make to the property over a number of years.
Sixth, when you sell the property, the depreciation you took is recaptured, but your net gains are only taxed at the long-term capital gains rate – not as ordinary income.
Seventh, and I love this one, if you find an investment property you like better, and you follow the rules, you can exchange into the better property with absolutely no tax implications!
Seventh – and this is THE BEST reason to own rental property – your tenant is the one paying the house off and giving you all these benefits!
The guys I met with loved these benefits, but they weren’t thrilled with the idea of finding or managing rental property.
No problem. Real estate deals can be broken into the following parts: Growth, Income, Amortization, Profits, Management, Tax Benefits and Use. By dividing these up, win-win deals can be structured.
Here’s our agreement: I will find a 50-cent-on-the-dollar deal for them to buy. As owners, they’ll receive all of the tax benefits. I’ll get an option for part of the upside, so we’ll share the growth. I’ll manage the property, which means we split the income, and they keep clear of the day-to-day management headaches. We’ll all benefit from Amortization. And the tenant will get the use of the property.
Bottom line: With the coming tax increases, consider partnering with successful business owners to create win-win deals!
Do you seek real-world real estate investing information? Go to BillandKimCook.com. It’s packed with free creative deal structuring techniques and strategies. Bill and Kim Cook have been investing in real estate since 1995. Their portfolio consists of single-family rentals, a small mobile home park, plus notes and options. If you have questions, give Bill a call at 770-815-8727.
