Advantages of Denver Real Estate Investing
It is widely known that owning your own home has several great tax incentives that works in your favor. You can throw in the fact that you get a few more tax incentives when talking about real estate investment properties, however these types of tax incentives are sometimes mis-understood. Real Estate investing has always been known as a solid way in accumulating wealth and financial security, you can learn more by reading this article.
Residential real estate investing, can be defined as owning a property as a rental or lease back, comes with a tax advantage or deduction for the value of a home that depreciates. The depreciation tax deduction is limited to the actual homes value, which is commonly known as an improvement, the depreciation does not include value of the land. Condos or certain townhomes have zero land value, this means 100% of the total purchase amount is eligible for the depreciating tax rule. Depreciation rules state that the owner of a real estate investment property may deduct the property depreciation over a span of 27.5 years. This means if you purchase a rental property for $27500, you can deduct $1000 per year for 27 years from your taxable income.
The IRS gives also gives depreciation advantages related to certain types of business equipment and other improvements on the property. general examples of these additional advantages are company vehicles, tools used for business related operations, carpet, and appliances. The IRS and the government views real estate investing as a small business, this makes it very important you approach it as such to ensure you get all the benefits of the tax benefits.
Even though a high majority of Denver investment properties tend to appreciate in market value, each property looks like it is losing value on paper. Expenses of this type are often referred to as "ghost expenses", this means they look like a loss on paper but in reality don't cost the owner anything. Taxable income is reduced while items such as interest on the mortgage, property tax, home owners insurance, public services and utilities, along with repairs does not require any cash outlay. This results in the property having a positive cash flow, but still has an end result of a loss for tax purposes.
As with any IRS tax advantage loophole, there are rules to what is allowed and for who is qualified for these benefits. A part time real estate investor has a limit to the yearly deduction allowed. If your income is $100,000 or below the limit is $25,000 for that year. If your annual income is $100,000 to $149,999 the allowed deduction amount begins to decrease, If your annual income is $150,000 or above you are not allowed to deduct any of the loss. If you are a full time real estate professional by trade, these limits do not pertain to you at all.
The IRS will designate an individual as a real estate professional the person spends 50% of their work week hours or a minimum of 750 hours per year working on real estate related activities. Full time fix and flip professional, contractors, real estate brokers, property managers, and land lords are all examples of IRS defined real estate professionals. There are many other examples of full time Denver Realtor, but the above are the most common. As long as you are eligible for the designation, you are allowed an unlimited amount of loss towards your taxable income. For big time investors with a large real estate portfolio, this is extremely beneficial to that investor.
For the IRS to allow you to be designated as a real estate professional, you will need to allocate and be able to prove how much time you spend on real estate related work. Real estate activities are defined as anything develop, redevelop, construct, reconstruct, acquire, convert, rent, operate, manage, lease, or sell real estate. The rule of thumb for this is that you head up and are involved in the activities, you do not physically have to perform this work yourself and in order to be eligible. Examples of this are planning or holding a meeting, supervising the real estate related activities, or anything that goes into running a business qualifies.
The tax and overall advantages to Denver real estate investing are vast and can help in the profitability of your investment business. The tax benefits along with the notion that the property will appreciate in value greatly reduces the risks involved and helps to maintain a higher level of profit. Investing in real estate, requires a well thought out plan, and a high level of execution to ensure being a sucess. It is always a good idea to consult with an experienced CPA or tax consultant before making the jump in real estate investing.
