A few times a year, a client will ask whether he or she should invest in a residential rental property. The conversation usually starts out like this, “My neighbor said he has a rental property and is able to write off all kinds of expenses.” The client is usually an employee receiving a regular paycheck, maxing out their retirement plan contributions each year, very little in the way of investment accounts, and looking for a way to invest their money while reducing their tax burden as much as possible. I don’t own any rental property myself, but I have worked with many clients who own rentals and I’ve learned a lot about them over the years. The first thing I know is, being a landlord is not for everyone. If it’s always been a dream of yours to chase down rent checks and get calls about clogged toilets at 3 AM, then by all means, buy a rental. But make sure you know what you’re getting into first.
Owning a Rental Doesn’t Mean You Get to Expense All The Things
Yes, when you own a rental property there are certain expenses you can deduct for tax purposes that you can’t deduct on your personal residence, such as utilities, maintenance, and association fees. You won’t be able to take a deduction for the principal portion of the mortgage payment or allocate a bunch of your personal expenses to the rental property. The IRS is not going to buy that you drove 20,000 miles last year maintaining a rental property that is a mile away from your home. You do get a deduction for depreciation on the building itself (but not the land). Depreciation often works in your favor since you’re able to take a deduction for the decrease in the value of the building when in fact real estate (typically) appreciates in value. However, when you eventually sell the property, your basis in the property will be reduced by the depreciation you claimed over years, and you’ll pay tax on the difference between the sales price and the adjusted basis of the property.
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