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Buying and Holding Rental Property
Why would someone buy a rental property? You have to fix it up, and then deal with tenants and toilets!
Tax season is in full swing. This month, we are talking about a beneficial tax break, called depreciation, on rentals. Depreciation is
a reduction in the value of an asset, over the course of time, due to wear and tear. But that's not the only reason to invest. People buy and hold rental properties because once you've made your down payment and paid closing costs and fix-up costs, your rental income usually covers your payments! Duplexes, for example, are a great opportunity to live in one unit and rent out the other unit to help offset your expenses.
During the holding period, your rental property not only shelters the tenants, it minimizes part of your taxable income due to depreciation or paper expense. When you get rent, you're not getting taxed on all of it. You have an additional expense, which is the depreciation.
Though your property is likely to increase in value through the years, the IRS gives you the right to depreciate as an additional expense. If you decide to sell later, the tax laws still allow a favorable capital gains treatment, such as it does now, to shelter part of the profits.
Rental property tax laws are complicated and ever-changing. It is highly recommended you work with a qualified tax accountant.
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