Thursday, February 14, 2008

LANDLORDS: Make your rental(s) work for you!

LANDLORDS: Make your rental(s) work for you!
If you ever mailed an envelope containing a monthly payment
to a landlord, you qualify as a rent payer. What you might
not realize is that the owner of that real estate is
getting lots of deductions for expenses related to owning
property.

When you own rental property, you may spend money on
advertising. Promoting the vacant site, whether in small
print ads in newsletters, newspapers, magazines and the
Web, or in big signs and billboards, can be a necessary
expense. It's also a deductible one. So are the expenses
you incur to maintain your property in good condition.

Remember that because you are a rental property owner, the
fees you pay related to that property can also be written
off. For instance, if you pay a management company to
collect rents and take care of your property, that cost can
be subtracted on your tax return. Of course, every savvy
real estate investor knows about the magic of depreciation.
This is an expense that is really just a gift from the IRS
to real estate investors. There is no out of pocket expense
and everyone expects the property to increase in value. But
the IRS still gives investors a deduction as if the
property were decreasing in value. That's about the best
kind of deduction you can get.

"Magic?" you're asking. "Isn't depreciation just a loss in
value of my property? So how is this a good thing?" Simply
put, depreciation is the biggest tax break for real estate
investors - money in your pocket for things you already buy
and there is minimum effort needed to collect on it. How
does depreciation work? It is the distribution of the cost
of a long-lived asset over the estimated life of that
asset. In the case of a residential rental the time period
is 27.5 years. You may deduct 3.636% (1/27.5) of the
purchase price each year. This will be a steady deduction
over the life of this property.

Sometimes we desire to speed up the process of depreciation
to put more money in our pockets. In the case of land
improvements or personal property also called "chattels"
the life span can be as short as 15 all the way down to 5
years. Appliances, cabinets and carpets are all examples of
things that depreciate over 5 years. A $1,000 refrigerator
yields roughly 20% or $200 in depreciation each year. Total
this up over all your personal property and just like magic
money comes rolling back to you.

Now that you know what depreciation can do for you, I'm
sure you'd like to know how to do it. Chattel Appraisal is
a strategy to separate out land improvements and personal
property components from the real property owned. You must
be careful not to value the land too high or too low, make
sure you are depreciating the property over the right
period of time, and verify you are utilizing the right
foundation for depreciation (many will use a basis that is
too low, missing out on $$$.) These are all things you can
do yourself - simple, but time consuming. Now that you know
the wonders depreciation can do for you, get out there and
make some magic!

Now if you are a business owner, the rental fees you pay to
support your business should be recognized. Your business
may work out of rented space. If so, the cost of the
location is deductible. So are any property taxes you may
pay for the landlord as part of the lease. Maybe your
business has a parking facility that you rent. If so, the
same rule applies.

Perhaps your business requires storage of goods. If you are
renting warehouse space don't forget to deduct the fee.
Even storage of a much smaller kind—a safety deposit
box that contains business-related papers—qualifies.

Paying rent is usually a part of being both a real estate
and a business owner. Make it work for you.

Warmest Regards,

Tom


----------------------------------------------------
Tom Wheelwright is not only the founder and CEO of
Provision, but he is the creative force behind Provision
Wealth Strategists. In addition to his management
responsibilities, Tom likes to coach clients on wealth,
business, and tax strategies. Along with his frequent
seminars on such strategies, Tom is an adjunct professor in
the Masters of Tax program at Arizona State University.
For more information, please visit
http://www.provisionwealth.com

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