One of the reasons major investors play in the industry of real estate is:
1. The last time they looked, God wasn’t making any new land. In fact with global warming, the globe is losing land.
2. The IRS provides locked-in tax-write off on Schedule E in the amount of $25,000
Let me make it clear. If you have investment real estate your tax write off can be up to $25,000 EACH year. This is $25,000 which is subtracted from your income, which utomatically lowers your tax liability.
You earn $80,000 a year. You purchase a four-plex and rent each unit out for $600 a month. (One-bedroom, one bath units) Your mortgage payments are $2,460 a month. Your mortgage interest for the year is $24,000. Your income from rentals is $12,800. (Not all the units were rented)
You have additional expenses, such as waste management, up-keep of the property, property taxes, gardening, painting, pluming, travel to and from the property, insurance, ads for rentals, ten-percent for property management and a host of other small expenses that comes with providing shelter for four separate units.
You end up with rental income of $12,800, and total expenses of $32,000. You have a loss of $19,200. You place this lost on Line 17 of Form 1040 and your total income is reduced by $19,200. This means your Adjusted Gross Income will now be (if there are no more adjustments) $80,000 minus $19,200. So instead of paying taxes on $80,000 you will pay taxes on $60,800.
Plus you will still have ownership of the rental property and can carry over previous year’s losses and repeat the same process next year, if the tax laws remain the same.
This is called building wealth “with” the IRS. Small private real-estate investors do well with this major tax loophole each year. The book The Schedule E Tax Loophole, by C. Ingraham, RTRP goes into details about this massive tax loophole and how to build wealth when using it.
There is one major drawback if you earn over $100,000 a year the passive activity loss limitation rules may apply and the amount you can forward over to Line 17 of the Form 1040 may be reduced. For this reason, many investors create corporations, who manage not to pay them, so they can keep their annual income below $100K.
If your annual income is over $100,000, you may want to look for an experienced tax attorney to set up the best corporate structure. If your income is less than $100,000 check out the book: The Schedule E Tax Loophole and see how one several tax-payers saves thousands in taxes each year. (You don’t have to have an e-Reader, you can download Amazon’s free app and read on your desk-top or laptop)
Note of caution: If you report your rental property on Schedule E, rather than a corporation, you may want to increase the liability insurance on the property to decrease your personal liability.