Tax Benefits of Rental Properties

[Will Rodgers]

Hi All,

I understand that there are great tax benefits/write offs as it relates to the purchases you have made towards your rental property like depreciation, maintenance fees etc...My question is...Are there any tax benefits of simply owning a rental property? For instance, Will my personal taxable income be reduced by simply having the rental property or is the only way to benefit on my taxes is to write off the money I have spent? This question is stemming from me trying to find new ways to reduce my overall taxable income as a single person and thought about rental properties as a way to do it...Any other ideas to reduce my taxable income as a single person because I don't have write offs for kids, personal home etc...???

[Dave Toelkes]

@Will Rodgers

Yes, a rental property can definitely lower your taxable income.  If your rental property generates a negative cash flow, then every dollar you lose on the investment each year (up to $25K annually) could potentially save you 25¢ in taxes on your other ordinary income -- up to a point.  If your annual MAGI is over $150K, this "tax benefit" is no longer available to you.

Rental ownership has a cost for things such as property taxes, hazard insurance, mortgage payments, maintenance, upkeep, HOA fees, etc. You have these expenses of ownership whether or not your property is tenant occupied. You also have rental operation expenses such as property management fees, legal fees, time and travel expenses whenever you show a property or do a moveout, advertising, etc.

The real tax benefit of rental property ownership over another form of investment is the ability to use depreciation to offset rental income.  A property with a $6000 positive annual income on paper that has a deprecition expense of $6000 per year has no net taxable rental income.  The $6000 positive cash flow is offset by the depreciation expense, and therefore, effectively giving you $6000 in tax-free income.  If you can do this with four or five additional properties, you have a tax free income equivalent to the take home pay from a full time W-2 job for many Americans. 

The point I want to make is that seasoned buy and hold investors do not buy a property, but instead, they buy the positive cash flow a property can generate.  The tax benefits are rarely, if ever, a primary consideration -- just an additional perk to a good deal.