Want to use real estate investment property to reduce your taxes?
Tax reduction through your ownership of a $585,000 rental property begins with the concept of “allowable depreciation”. Claiming straight-line tax reduction depreciation over 27.5 years on seventy-five percent of the $585,000 acquisition cost, and also claiming five percent of the acquisition cost for tangible personal property, yields a monthly tax reduction savings of $1,817.05.
At a minimum, even if you are subject to the passive loss limitations under Section 469 of the Internal Revenue Code, your $530.76 monthly positive cash flow is 100% sheltered by the tax reduction affects of depreciation. So, you get to keep the entire 4.35% return on your investment. Furthermore, if you qualify for exemption from the passive loss limitations imposed under Section 469, you have the right to offset any income with the remaining $1,286.29 (or $15,435.43 on an annualized basis), of unused depreciation. The tax reduction depreciation principle just saved you $4,321.92 in Federal Income Taxes for the year, effectively increasing your return on investment from 4.35% to a very impressive 7.31%.
Note, even if the passive loss limitations of Section 469 preclude you from offsetting unused depreciation against other income, you do have the right to offset it against any passive income you otherwise receive. In general, passive losses can be used only to offset passive income. However, if your rental real estate is a passive activity, you may offset a passive activity loss of up to $25,000 against your non-passive income if you actively participate in the passive activity.
The $25,000 allowed passive loss is phased out if your modified adjusted gross income (as a married couple, is between $100,000 and $150,000. You lose $1 of deduction for every $2 your income goes above $100,000.
"Active participation" means that you have significant participation in making management decisions or arranging for others to provide services. These management decisions might include approving new tenants, deciding on rental rates and terms, and approving capital or repair expenditures. However, you're not considered to have "actively participated" if you own less than 10 percent of the property.
If you are confused, and have questions about the above, you should contact your tax advisor or "CONTACT US"