Recently, I received the following question about the tax benefits of investing in real estate:
Hello, I had a question for you guys. I just want to make sure I understand. It is about tax benefits. I have a business right now and I have to pay full taxes! If I had real estate like family home, commercial etc...i could take the depreciation of this properties and apply it towards my business income is that right? Can i do that even if I make money on it every month? Could I really reduce or even eliminate my tax payment?? thanks HARRY.
There are actually several subtexts within this question. The first is concerning taxes on business earnings. I'm always concerned when I hear a business owner complain about their high taxes. This tells me that they are not getting good tax advice. The best tax benefits in the Internal Revenue Code belong to businesses and business owners. But many business owners are just like Harry - they don't know how to structure there business to obtain the greatest tax benefits. So number one is to work with a CPA who can help you take full advantage of business tax benefits.
The second question is whether real estate can really give you deductions against other income even when the real estate in question provides positive cash flow. The answer to this is a resounding "YES." As remarkable as it may seem, the IRS actually allows you to take a loss on appreciating real estate even when you have positive cash flow from the property. This is the magic of depreciation. Depreciation is a non-cash deduction that can easily be more than the cash flow from your rental property. The result is a loss that you may be able to use to offset income from your business or salary. There are several limitations, of course, most or all of which can be overcome with the proper planning. Be sure to talk to your Tax Coach about this amazing benefit and how it can apply to you.
The final question of Harry's is whether real estate tax benefits can actually be great enough to reduce a person's income tax to zero? Hard to believe? It's true, though. We have several clients who have substantial positive cash flow but pay no income tax due to the tax benefits from their rental real estate.
Thanks for asking such a great question, Harry.
Warmest regards,
Tom