Wednesday, September 26, 2012

Low Taxes With Real Estate

investment as percentage of national cash flow...

An attractive element of real estate investment is that it creates a paper loss when in actuality you have gains. To understand how this can lower your taxes while increasing your income, here’s a quick example.

Rental Condo
Rent Collected
Mortgage Pmts
Total Cashflow
Total Income

The rental condo produced $2,000 in income - $2,000 of real money in your pocket. When depreciation expense is included, the condo shows a loss of $5,000. However, the loss is a result of depreciation, a non-cash expense. What this means is that depreciation is expensed on the income statement, but does not represent a real cash outflow, so it creates a loss on paper despite the positive cash flow in reality.
Now if you had 5 condos just like this one, you have reduced your taxable income by $25,000 (the passive rental loss limit you can deduct by law), when you have actually earned $10,000 from your properties.
Case in point. Last year, my salary was in the six figures. But my taxable income, due passive rental losses and other deductions, was a mere $36K. I paid only $5K in taxes.

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