For me, September 15th is a love, hate relationship as it is the last day that I can file my business tax returns. The hate part is obviously getting that final number that I owe the IRS. The love part is finding out the number I would have paid had I not owned real estate, especially the past couple of years where I am able to claim bonus deprecation. Taking deprecation can be tricky as it does require long term planning, not just from a real estate purchase strategy, but your overall business and personal investment goals, otherwise you are kicking that tax payment down the road. I have seen quite a few investors take their tax savings to buy “stuff”, which is a really bad strategy as “stuff” does not make you money. In this case, “stuff” could bring a larger tax bill in the future that you were not planning on having. Unless any of you are doing business with a Tony Soprano type or any other individual in the “Waste Management or Olive Oil” business, I could not imagine a more stressful situation then owing a large amount of back taxes. The point of taking the deprecation is to capture tax savings and taking those savings to re-invest. Besides deprecation other tax breaks you may be eligible for when you own rental property include mortgage interest deduction, home office deduction, a portion of your utility bill, cell phone and internet expenses, travel expenses to the market you own or may own rental property and a portion of your CPA bill. There could be more, consult with your CPA.
For most, our largest expenses are taxes, thus if there is a investment opportunity to keep more of what you make and profit from that opportunity, then I would say that is a good opportunity. This is why I love real estate. We all have to pay taxes, but we all are free to control how much we pay. This could be good advice for those of you who live in states with large tax burdens on ideas of how to keep more of what you make.
As always, what works for me and how my CPA structures my return may not be best for you. Take my comments as guidance only and consult with your CPA to see what works for you.