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Real Estate Investing Considerations

Benefits from Tax Deductions

A real estate investor can benefit from both tax incentives and deductions by carefully keeping records and reporting all gains and losses. By reporting these on your tax return you may be able to lower your total income and lower your tax rate, allowing you to turn a negative loss into a profitable gain!

When a real estate investment is used as a rental property, the investors can claim deductions for financing as well as expenses incurred while operating an d managing that rental property. It is important to keep in mind that the total expense s cannot exceed the amount of real estate income that the investor yields. Once the total expense is incurred and documented, the investor can subtract that amount from the adjusted gross income when determining their personal income taxes. Some of the items that can be deducted include:

    * Mortgage Interest Payments
    * Property Management Fees
    * Insurance
    * Maintenance and Repairs
    * Real Estate Taxes
    * Utility payments (made by investor)
    * Travel, Advertising and More!

In addition, an investor can receive tax breaks for depreciation of a particular property. Unlike automobiles, when a building depreciates the investor can record a loss regardless of the actual market value of that property. To learn more about tax depreciations seek the guidance of a professional tax advisor. (Reference Section 1031 of the U.S. Tax Code.)

Generating a Positive Cash Flow

Real estate investors can generate a positive cash flow in one of two ways, either pre-tax or post-tax. Plea se note that both Federal and State require that you report all investment returns (rental payments) as income.

Pre-tax: Before taxes have been deducted for the current year. The simplest way to make a profit on a real estate investment is when the income received is greater than the expenses paid. But this is typically rare when dealing with real estate.

Post-tax: After taxes have been subtracted and various tax breaks have been applied. This is more common, yet slightly more complex in that an investor has to show that their expenses outweighed the collected income during the year.

In both cases, you must have a reliable source of rental income. To protect your real estate investment, be sure to conduct a thorough credit, employment and background check on all prospective tenants. Additionally, be sure to require that your tenants sign a lease agreement. This is a legal document that will help to protect your rights in the event that your tenant falls behind on payments.

Increasing Equity in a Real Estate Investment

Before a real estate investor sells or refinances, it is very important to calculate the amount of equity available in order to cash in on the investment at the most op portune time.

Equity: The value of a property minus the owner's/investor's outstanding mortgage balance.

For Example: If the property value is $450,000, but the balance owed is $385,000, then the equity available is $65,000.

A real estate investor can utilize the equity in their properties in several ways. Simply put, the investor needs to make sure they are using the equity to leverage the best return on their investment. Some ideas include refinancing for a lower payment, investing in additional rental properties or upgrading to a more valuable property.

For additional information on how to achieve a higher return on your real estate investments, contact me! I'm a licensed real estate professional and I'll be happy to answer any questions you may have.