Expenses associated with the property are tax deductible and those deductions may reduce the amount of income taxes you pay. For instance, if rental expenses exceed income, you can take up to $25,000 in losses that can offset income from other sources such as wages or interest.
What expenses are deductible?
On residential real estate, depreciation of the property is over 27.5 years. So take for example a property whose basis is $275,000. Divide the basis by 27.5 equal $10,000. In this example, each year can depreciate $10k against rental income. Adding depreciation to expenses usually results in “paper loss.”
A symbiosis occurs with real estate – as the mortgage principal decreases with each mortgage payment, the property value increases. The symbiosis occurs on the sale of the property resulting in more cash out.
Take for instance a property that is bought for $300,000 with $100,000 down and $200,000 mortgage. Let's say over time the mortgage principal is down to $150,000 and the value appreciates to $350,000. If you sell that property for $350,000 and pay off the mortgage of $150,000, you now have a cash out of $200,000. Remember, only $100,000 was put down on the property and the sale, the cash return has doubled.
Is Now a Good Time to Invest in Real Estate?There is a wise saying in the investment world: Buy low, sell high.
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