The Benefit Of Real Estate Investing And Tax Shelter

By Author: James Kobzeff
Total Articles: 44
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With the bigger bite the Feds want to take out of your income for taxes, don't you think that it's time you start considering investing in rental properties to help shelter some of your income?

Okay, let's consider your alternatives. You can hide your money in a strategically-dug hole in the backyard or you can place it into a CD and wait for the economy to improve-yes, just the way your grandfather or father might have done before you. Fair enough. But this economy is not the same as the one that your grandfather or father faced. In fact, they might not even recognize all the challenges that you are facing.

Sure, it might feel safer to hide your money under a mattress, a choice burial spot, or a CD but it's not. The money under your mattress will eventually be eaten away by inflation (yes it will, sooner or later). And whatever money you have in a CD (for all intents and purposes) is just collecting dust because you are probably earning just 1-2%; and hey, if you haven't noticed, that isn't even keeping up with inflation.

So what are you to do? Start investing in real estate to take advantage of the tax ...
... shelter laws and maybe by the end of the day you can keep more of your money and even make a profit down the road.

Here's how it works.

An owner of an investment property takes in taxable rental income and pays out tax-deductible operating expenses (like insurance and repairs) resulting in a "net operating income" on which taxes must be paid. However, the tax code permits further deductions.

With an income-property investment you can deduct mortgage interest. And the benefit to you as an investor is that interest is not really a cost associated with operating the property, and in reality will get paid (along with your entire mortgage) by the tenants. So this IRS allowance is a sweet deal for real estate investors.

A depreciation deduction is the other source of tax shelter beneficial for those who own rental property. In this case, at the same time the market value of an income property is undoubtedly increasing over time, the tax code makes the assumption that the buildings are wearing out over time and allows investors to take a deduction for that presumed decline in value.

But here's where it gets really exciting. Depreciation (or cost recovery as it's now called) is a non-cash deduction. Therefore, it doesn't affect your cash flow and you aren't required to shell out money to get the deduction. Depreciation deductions are merely taken and thereby provide an excellent way to shelter income without additional cost. Moreover, in cases where the deduction is large enough, it can also provide shelter for other investment income as well.

Here's the concept in very simplified fashion.

Income
less Operating Expenses
= Net Operating Income
less Mortgage Interest
less Depreciation
= Taxable Income

If you're new to investing, of course, the toughest part (not unlike any new venture) is getting started. But with a systematic plan for investing in real estate you can succeed the same way others have. Here's a suggested approach consisting of five phases: (1) Learn about real estate as an investment vehicle. (2) Research the market in your local area. (3) Plan how to invest your money. (4) Invest your money according to your plan. (5) Manage your investment to meet your goals and objectives.

You get the idea. Educate yourself, build an investment plan, make your move, and then roll up your sleeves and stay involved.

One other suggestion (actually two suggestions. Make your first investment a conservative one by not trying to hit a hole in one the first time you tee off. Secondly, get the resources to run the numbers yourself so you don't base your real estate investing decisions solely on what others might be telling you. Real estate investment software can help you do that very affordably.

Here's to your real estate investing success.
James Kobzeff is the developer of ProAPOD - leading real estate agent software since 2000. Create rental property cash flow, rate of return analysis and marketing presentations in minutes! Learn more => www.proapod.com