Tax Deductions In Real Estate Investing

[Luisito Espanola]

Hello, I'm a newbie in this site and real estate investing. I have a question for all you professional investors. I want to know the best way to setup my company in order to make the most money and pay less taxes. I hear someone say they take over 400 deductions every year so they pay less taxes. What is the best way to achieve this?

[J Scott Hamilton]

A couple of things to consider with tax deductions:

1) The expense you avoid is worth far more than the tax deduction on that expense.  Don't accumulate needless expenses just for the deduction.

2) The income you earn will still net out to money in your pocket even after paying the tax. Don't leave income on the table just because you will be taxed on it.

3) Most real estate expenses are deductible in the year you pay them, especially if the benefit is immediate (like a utility payment or property tax).

4) Some expenses are prorated through the life of the improvement, such as depreciable buildings and roof repairs. This is also known as a capital expenditure (although land is not expensed). Even though you will be out of pocket up front for the expense, it will take years to get all of the tax deduction.

5) Choosing your tax strategies with legal entities and exchanges will change the timing of your tax bill and the tax rate at which you pay. Most have tradeoffs in terms of benefits and complexity.

So these are five rules that I used to advise my clients when I was in practice a long time ago. If you keep track of every expense, a tax professional can go over what is usable or not, and how to best put them to use.

Scott