This may seem bold to hear from your CPA. I’m not a realtor selling you real estate, but as a tax lawyer, I am actually trying to help you save taxes and build wealth at the same time.
I consistently repeat and encourage my clients and students everywhere I go that working towards buying a rental EVERY year is critical to building a retirement and wealth. It’s a goal that is tangible, emotional, conceivable and realistic for most Americans.
Now I realize a rental may not be for everyone, AND some of you have had a bad experience before with real estate. However, I would at least like to encourage you to consider it and get the process started. Maybe you already have a deal in the works.
A good rental property strategy will not only to build an incredible long-term and sometimes immediate tax strategy, it will inevitably build wealth for future retirement and should provide current cash flow benefits if you choose wisely.
Here is a diagram of the 4 benefits to Rental Property I want to discuss briefly with you and suggest you consider this strategy seriously as part of your investment and tax planning strategy.
The 4 Benefits to Rental Property
Appreciation. This is rental property you are keeping at least 7-10 years. This is not a fix and flip strategy. The National Association of Realtors (“NAR”) has reported that real estate nationwide has averaged over 6.74% appreciation during the past 50 years.
This rate of return out performs the S&P 500 and most Wall Street investments. Now I realize not all property in every market experiences this growth, but some actually do even better than the national average. Don’t discount appreciation.
Mortgage Reduction. This is often an overlooked benefit to rental property. Think about it. If you purchase wisely, the property should be at least be ‘breaking even’ in cash flow and thus the renter is paying the mortgage for you.
The principle reduction in the mortgage instrument is an ongoing tax-free benefit along with appreciation as you hold the property. This is a return you can calculate and count on over time with a typical mortgage. Keep this in your spreadsheet as you calculate your total Return on Investment.
Tax Benefits. It’s no secret that rental properties lose money on paper. With the power of deprecation, the fact you get to deduct the mortgage interest your renter is paying for you, and not to mention travel, property taxes, HOA fees, repairs, maintenance, home office, supplies, cell phone, etc… the tax benefits add up quickly!!
Now of course, as I have discussed in a previous article, how you are ‘classified’ as a real estate investor is critical (Passive, Active or Professional). Review this article here.
However, at the very least, you will be able to carry these losses forward indefinitely to write off against future property sales, if you aren’t able to deduct them immediately against your other income. The tax benefits can be phenomenal.
Cash Flow. If the economic downturn and the drop in real estate values have taught us anything, it’s that we MUST analyze and purchase property based on cash-flow. Good rental property cash flows…bad property does not.
It’s absolutely critical that we shoot to purchase cash flow property and mysteriously the other 3 benefits fall right into place. It’s amazing!! Ironically cash flow also becomes a rate of return and a tax-free benefit due to the ability to maximize all of the expenses related to rental property.
In summary, many a savvy investors realize they can experience tax-free cash flow and have double digit, if not, triple digit rates of return on their leveraged rental property.
When it comes to the tax benefits coupled with quality investment strategies, it’s no surprise that the most wealthy and successful people in America hold rental property as a large part of their portfolios in one form another.
To analyze your tax position in regards to rental property and how it would affect your tax return, please give us a call to schedule a consultation with one of our tax advisors.
Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the new book “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions” and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com.