What Does Tax Season For Real Estate Investors Really Mean?

By on April 5, 2017

One of the most polarizing days of the year is nearly upon us: Tuesday, April 18. Referred to more colloquially as Tax Day, April 18 is the deadline for which individual income tax returns are due to the federal government. And, as I am sure you are already aware, Tax Day resonates differently for just about everyone. For what it’s worth, people either love or hate it, and it’s not hard to see why. Tax season for real estate investors, however, is an entirely different story. Combined with a little ingenuity and an acute attention to detail, a little foresight can turn tax season for real estate investors into their favorite time of the year.

It’s true: taxes can really help those that are prepared for them, but I digress. For the most part, Tax Day is as unpopular as it is inevitable. Far too many people don’t look forward to giving up their hard earned money, and I don’t blame them. Nobody should be thrilled at the prospect of giving away the one thing they work so hard to obtain.

Fortunately, for your sake and mine, Tax Day doesn’t have to remain synonymous with the worst days of the year. If for nothing else, there is a large contingent of entrepreneurs that have come to rely on tax day for several inherent advantages. Tax season for real estate investors, in particular, isn’t something to dread, but rather embrace. In fact, you could argue that Tax Day is one of the best days of the year to build wealth for real estate investors that mind due diligence and plan accordingly.

Tax Season For Real Estate Investors

Investor tax benefits

I want to make it abundantly clear: taxes award savvy real estate investors a unique opportunity to grow their wealth unlike any other exit strategy. All things considered, building wealth isn’t relegated solely to making money, which is an important distinction to make. Making money is only half the equation; you need to be able to save the money you are bringing in (no surprise there). And nothing, as far as I am concerned, can help you save money more so than tax season for real estate investors.

If you really want to build wealth, you have to view tax season as what it really is: an opportunity to shelter your income. Provided you have done your homework and taken the right steps, there is no reason you shouldn’t love tax season for real estate investors. And if you aren’t convinced, let’s take a look at some of the most obvious reasons tax season for real estate investors isn’t something to fear, but rather welcome.

One of the greatest tax benefits for building wealth is reserved for those investors with a rental portfolio, or even just one rental property for that matter. That said, if you are the proud owner of an income-producing rental property, it’s entirely possible that you qualify to take advantage of one of the greatest tax benefits: depreciation. Investors can recover the cost of their rental properties (provided they are actively producing income) through annual tax deductions called depreciation.

As its name suggests, depreciation is defined by the I.R.S. as a reasonable allowance for exhaustion or wear and tear, including a reasonable allowance for obsolescence. In other words, the powers that be are willing to compensate rental property owners for the inevitable deterioration of their asset, not unlike a regular business expense. And while you can’t claim the entire cost of the rental property in one year, you can claim a portion of it every year for a total of 27.5 years. It’s worth noting, however, that while the IRS is willing to compensate you for the depreciation of your home, history suggests appreciation occurs more often than not. It’s entirely possible to deduct depreciation losses from your annual tax return even when your home appreciates, and therein lies one of the greatest benefits to investors.

In addition to depreciation, tax season for real estate investors is made all the better by the mortgage interest deduction. While not as exciting as its depreciation counterpart, the mortgage interest deduction is exercised by a lot more people. If for nothing else, more people know about it. However, that doesn’t mean it’s not equally as important. The mortgage interest deduction is one of the main reasons tax season for real estate investors is so exciting.

As its name would lead you to believe, those with a mortgage are able to write off the interest they pay on it. And, due in large part to the amortization of many loans, most homeowners will be able to write off larger amounts in the earlier stages of their mortgage. Since most interest is typically paid up front, homeowners will benefit more from the mortgage interest deduction in the earlier stages of their obligation.

If you are wondering whether or not you qualify for the home mortgage interest deduction, you must meet the following criteria:

  • You file Form 1040 and itemize deductions on Schedule A (Form 1040).
  • The mortgage is a secured debt on a qualified home in which you have an ownership interest.

For what it’s worth, the mortgage interest deduction is relatively easy to qualify for, and it’s significant enough to warrant your attention. So if you are looking to build wealth this year, look no further. The tax season for real estate investors wouldn’t be complete without this deduction in the books.

I can’t stress it enough: building wealth has as much to do with making money as it does with saving it. And for what it’s worth, few vehicles offer investors a better chance to save money than taxes. If for nothing, else, tax season for real estate investors is a shelter for their income more than anything else — provided they took the appropriate steps. With he right plan in place, there is no reason you shouldn’t look forward to doing your taxes as a real estate investor.