The 5 Profit Centers of Real Estate Investing Part 4: Tax Savings

“How can I save on taxes?” is certainly one of the highest-rated google searches, especially come April before that dreaded tax deadline. Who doesn’t want to keep more of your own money, in your own pockets?

Well, through real estate investing, you can.


What is Tax Savings with Real Estate Investing?

If you’ve ever heard that you have to spend money to make money, then what we’re about to teach you will verify this claim. You see, you have to spend the money on a rental property, and then you save money from that expenditure once your tax return comes. It’s one of the hidden benefits of real estate investing, and one of the reasons you see real estate in every not-so-average investor’s portfolio.


How do I access Tax Savings for my investment properties?

The tax savings from rental properties come from the write-offs and credits that our clients receive each year on their tax returns. Without these savings, an investor would be taxed on the gross rental income earned.  However, the rental properties our clients own only pay taxes on a small portion (or none) of the gross rental income earned that year because of these beautiful tax savings. 

(These tax savings are only available to business or investment-related activities, so if you own your own personal home, you can’t write that depreciation off the same way. )

This means you save money at tax time while dually growing your income through other profit centers such as home price appreciation.

Wait, you just said depreciation and appreciation in the same sentence, JWB, what is going on?


Home Price Appreciation and Depreciating Assets

Home price appreciation is one of the 5 profit centers too. You can read about it more in depth here, but essentially, home price appreciation is the increase in real estate values over a full market cycle.  

There’s a big difference between the appreciation of the market value of the home and the depreciation from a tax perspective.  You actually want both in order to earn the best risk-adjusted return on investment for your rental property portfolio. 

A rental property, or any home really, is a depreciating asset from a tax perspective. What this means is that the home starts “losing” its value from the moment it’s owned. But that depreciation can best be visualized by thinking about a new home. It’s fresh, the walls are painted and no one has ever lived there. The second someone steps inside the home to live, there’s going to be foot traffic, dust, rain on the newly finished roof, and usage of the gutters and pipes. That’s what they mean by depreciation–that every part of the home gets used, and as such a cost is incurred from that depreciation–the cost to fix, repair, or maintain it. Home value depreciation is typically a product of maintenance and upkeep on the land and the home structures themselves. 

While the maintenance side is one of the more common savings and easiest to visualize, there are several others.


Examples of Tax Savings for Rental Properties


Mortgage interest payments: When someone is renting your property you are still responsible for the mortgage payments. That comes with the interest on the loan you received from the bank (unless you bought with cash, in which case this doesn’t apply to you.) Those monthly interest payments are deductible. (This is true for rental properties as well as your primary residence.)

Property taxes: When you pay property taxes, these are typically included in your escrow account and are also tax deductible. 

Maintenance costs: Maintenance on a rental property can be costly, and these costs are factored into the house as a depreciating asset, which means that you get to claim these expenses to reduce your tax requirements.

Insurance premiums: Homeowners' Insurance premiums for your property are also typically included in your escrow account and are likewise tax deductible. 

Depreciation expenses: When it comes to rental properties, you can use one of several methods to calculate the depreciation expenses including the straight line method, declining balance method, and sum-of-the-years digits method. In order for these deductions to be eligible, the property must be held for investment or business purposes and all associated costs must be ordinary and necessary expenses.

Advertising costs: These costs can also be tax deductible when related to a business or investment activity. They have to be eligible under the IRS code and must be ordinary and necessary and a reasonable amount.


Why Tax Savings is a profit Center for Real Estate Investing

The tax savings you receive from real estate investing shouldn’t be complicated. That’s why one of the first things we do when our clients choose to invest, is to help you set realistic expectations for the returns you’ll enjoy on our first 30-minute phone call. We take the time with each client to make sure the numbers make sense and that you feel comfortable with the return.

Up Next! Don’t miss out on Inflation Hedging: Part 5, the final of the 5 profit centers.


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