It’s a known fact that investment property is one of the best ways to build wealth over your lifetime. If you are engaged in any sort of small business these investment properties give you opportunities to save on taxes associated with that business. Let's have a glance on how an investor can find tax savings that will help boost their income.
The most significant thing when it comes to tracking your taxes and income or proceeds on an investment property is maintaining detailed records of every transaction for the individual property. I mean to say that you must keep accurate and detailed notes that state exactly where any bills are coming from, how the payments are being made, and when they occur. If you do so you and your accountant (if anyone you have appointed to assist you) will be in a better position to track which investments are earning money and which ones are investments.
These detailed and true records will serve you as an important tool to find out the best means to save on your taxes. For instance, several big improvements that need to be done for real estate investments, such as a new roof or new carpet, are a large capital expense which can be depreciated over five years. This depreciation process will permit you to keep more of your rental income profits each year, and it may be possible to opt for an accelerated depreciation on few of the improvements to help you decrease your taxes even greater in the immediate time frame.
Deductions that are available for real estate investments include the following :
- Mortgage loan interest can be deducted to balance an equal amount of income. Borrowing $100,000 at 9% interest will yield an interest deduction of $9,000 during the 1st year of the loan, which can be used to offset $9,000 of income that would ordinarily be subject to income taxes. As regard to its effect on taxes, the interest deduction for investment real estate is not different from the interest deduction for a home mortgage.
- Property taxes levied against investment in real estate and which are paid to state/local governments can also be deducted from taxable income. The deduction for property taxes which you pay on investment in real estate is treated in the same way as the property taxes paid on your home, if you list deductions. Make a note that the higher the property taxes you pay, the greater the tax savings you can achieve.
- Insurance premiums that you pay for coverage of real estate investments are deductible from taxable income. Insurance premiums are not deductible in case you own home.
- Maintenance expenses allow you to claim deductions while calculating the tax liability for a real estate investment. Maintenance Expenses like expense on repairing rotting wood around the water heater or painting the deck can be deducted from your other income, thus reducing your tax burden. Maintenance costs can be quite large, especially for older properties or properties that might be rented to college students, for example. Being able to deduct those expenses is a very significant advantage of owning investment real estate, one which is not available to homeowners.
Improvements that are long term or which increase the value of the real estate are treated differently from maintenance costs. As maintenance expenses can be deducted in the year that they are incurred by you, improvement costs must be used to increase the cost basis of the real estate, thus reducing any gain or increasing any loss when the property is finally sold out.
- Depreciation accounts for the decline in value of an asset due to usage (wear and tear) over time, including most real estate. Depreciation decreases the accounting value (the value of the property as shown on financial statements) of real estate and at the same time makes up for an equal amount of income from taxation, however does not affect the market value of the property. Investors commonly obtain maximum tax benefits by depreciating real estate as rapidly as feasible. Rapid depreciation counterbalances the income and saves taxes sooner. Residential rental property at present should be depreciated equally over twenty-seven and one-half years, while commercial investment property should be depreciated over thirty-nine years.
As an owner of the business there are many opportunities awaiting you for saving on your yearly tax bill. Ensure that you keep detailed notes on all of your transactions, if necessary appoint a good accountant who is up-to-date on the current laws, and take advantage of the opportunities. This will definitely ensure you great savings on your business taxes and increase your wealth more quickly