The clients that I see who are investing in real estate - landlords, property owners, and investors - are building future wealth with assets. Your real estate is a business for tax purposes and may allow you to take advantage of a lot of the tax deductions available to businesses. Investing in real estate is a solid way to build wealth as long as you have a clear business plan and an efficient tax strategy.
Real Estate Investment Business Plan
The first thing you have to realize as a landlord is that your properties are a business. Too many new landlords think that their property will be a hands-off, passive revenue stream. But that just isn’t the case. An investment property will take work, often lots of it, and time.
And it’s important that the property you purchase makes sense from a business standpoint, and you’re not just buying it because you’d like to live in it someday. That means it should be a marketable home that appeals to the type of tenants you would like to rent to.
You should have clear, actionable goals meant to move the property forward and increase it’s value. These can be broken up into monthly or yearly benchmarks—preferably you’ll have a mix of both. Whatever you choose, the most important thing is that you have a plan.
Tax Advantages of Real Estate
- Passive income. Unlike wages from a job or a business you participate in, rental income isn't considered to be earned income. Schedule E is used to report "passive" income which is not subject to the additional self-employment tax. Passive income is income that you receive, but don't actually work for and "earn".
- Property Depreciation. There is no change to property depreciation in this bill. The useful life of residential rentals and commercial property is 27.5 and 39 years respectfully.
- Rental Income. There is no change to the self-employment tax rules. Landlords remain exempt from having to pay Social Security and Medicare tax on their rental income.
- Itemized Deductions. Rental property owners can still deduct business expenses from the rental properties. For owners of primary and secondary residences, home equity debt cannot be deducted unless the proceeds are used to purchase or improve rental properties.
Note: The Tax Cuts and Jobs Act (TCJA) enacted changes to the Internal Revenue Code that affect real estate investors and landlords. Property owners should consult their accountants and tax professionals for advice. You should work with your tax advisor to maximize your tax saving strategies as part of your long-term financial plan.
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Are you interested in learning more about income tax services in Washington DC or another location? We offer business accounting services for the local Washington DC area, as well as virtual services that are available for people anywhere in the United States. Contact us to learn more: (202) 789-8898