From the course: Rental Properties 101

Harnessing the advantage of tax deductions

From the course: Rental Properties 101

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Harnessing the advantage of tax deductions

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- [Narrator] A huge benefit of owning rental properties as investments is the tax treatment of these rentals. Now I cannot give you tax advice, and I highly recommend and encourage you to meet with your tax professionals. I'm going to mention three tax advantages that you'll definitely want to learn more about. Most of the costs or expenses are tax deductible against the income, in contrast to your primary residence, where you can usually deduct mortgage interest and property taxes. Almost everything else, if tracked properly, can be deducted to reduce your tax liability. This includes the mortgage payment, taxes, insurance, maintenance, and repairs, basically, all of your operating expenses. The amount you can deduct depends on how you file your tax returns for your rentals and may also depend on your adjusted gross income and status as a real estate professional. You may choose, for example, to create a separate company like an LLC for your rentals that may require a separate tax return. Again, please consult your tax professionals to learn more about the best way to take advantage of tax deductions. The cost of rental properties can be depreciated over time. Perhaps you've heard this before. What this means is that you can write off or take a tax deduction for the cost to buying rentals over a period of years. Typically the IRS allows a depreciation expense of both land and building value divided by 27 and a half years of useful life for residential real estate. I'm not sure how they got that number, but that's what they consider the useful life of rental properties. You get to deduct this depreciation expense every year and that reduces your tax burden on the rental income you collect. The third tax advantage I'm going to mention is being able to avoid capital gains taxes by using a 1031 exchange. When you are ready to sell a rental property you own, you can use a 1031 exchange to roll your profits or gains into the acquisition of another investment property. 1031 exchanges are also known as like kind property exchanges. As expected, the IRS has a lot of rules to follow in this process, and I recommend finding a company that specializes in the 1031 procedures. Usually title companies or closing agencies can help. This is a fantastic method of avoiding capital gains taxes and expanding your rental investment portfolio. Finally, one of the most powerful advantages, or pros, of rental properties is that they are the building blocks of obtaining truly passive income. The monthly cashflow contributes to your financial freedom. You can implement strategies based on your goals to help accelerate the compounding effects of acquiring a solid passive income portfolio and learning to strategically pay off leveraged debt.

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