What are some tax advantages gained by buying a rental property

Hi Tom,

Plenty. It may also depend on your laws - country, state and local. In
which country do you reside?

All direct costs associated with deriving income are generally
claimable against income. Loan interest, fees, other taxes, repairs
etc.

Gains can also be off-set against losses. If you have shares you wish
to sell for profit, your property loss may in part off-set the share
gain if you time the share sale correctly.

Chasing pure tax deductions is one way to go broke. Negative gearing
is generally for the short term and can be used (again depending on
your country of origin) to increase your cash flow.((221D revised) for
future reference if you want to discuss more). Eventually you won't be
able to borrow any more money as you will run out of equity - perhaps.

Negative gearing works in a rising market. That is, it will work for
you in both the short and mid-term if the market is hot. If your
capital gains realised at sale time, or equity value upon refinancing
outstrip your annual paper losses, you will get two bites at the
elusive cherry. Values tend to work in cycles also as Mums and Dads
move their money from property to shares and back again.

The higher your income, the greater the tax deduction. Individual
circumstance may change the whole story.

It's a broad question Tom, although I know it sounds simple at first.
Where would you like to go with your question?

Regards, Phil

ps Buy when they're selling and sell when they're buying.

Dear Phil

I am cosidering a single townhouse property in my neighborhood.  The
townhouse is selling for $265K.  It is neat and clean and will easily
be rentable.  I figure that I can rent it for $1400.00 month.  My
monthly costs will be about (1165 mortgage (interest included + / -
$535)  + 175 condo fees + 400 taxes & insurance)= $ 1741.00

As my current home is almost paid off (only 80,000 to go).  I have
almost no interest to deduct each year.  My tax bracket in 35-38 %
range.

Real Estate is booming in my part of New Jersey.  This house is a gem,
but there is only so much a rental can get around here. I know this
house will not last long.

Any advice is greatly appreciated.

Tom

Hi again Tom,

Your ROI is 6.3% gross, which is about standard for residential
property in my neck of the woods too. As you know, your tax concession
increases in real dollars as your income creeps to a higher bracket of
marginal taxable income. So, what to do? Well, first of all I should
qualify that I'm no accountant. Just ideas I have picked up through
buying, selling and discussing same with people who have made money in
the real estate game.

Congratulations on achieving the equity you have and the foresight to
use it to your advantage. I know of friends who are sitting on some
very lazy assets. Heaps of equity, some at 100%. But comfort zones are
another thing. I convinced my best mate to buy and he made $100K over
2 years after he re-sold. (Shoulda claimed a commission, but what are
mates for?)

I'm in Aus, so I can't help you much with "Nu Joisy". But I reckon the
principles are much the same. Minimise tax and maximise gain. If your
losses add up to $4092 per year, then your property must increase in
value by that amount also. If not, you are losing money/value/equity
in the mid to long-term. You might argue that the tax advantage puts
$1555 back in your pocket (using 38% tax). OK, that's where you need
to talk to your accountant. But, to achieve cash of $1555 you will
need to earn $2508 from your day job (at the same marginal rate).

You did not mention managing agent's fees. Are the Condo fees
inclusive of managing your property, or are you going to self manage
the tenants, maintenance, bills etc.?

Have you considered an "interest only" loan? If you have faith in the
booming market, let it run. Claim all interest and use the capital
difference toward paying off your own home. Reduce your $80,000
further for even more equity.

I have been told too, put your plans in writing. That's because we all
have different circumstances affecting our goals. What do you want to
achieve? By when? What's your Big Plan? Surely not chasing tax
deductions! So there has to be a better formula. Let me know when you
find it.

Just thoughts in discussion Tom, certainly not advice. If my figures
are incorrect, I'll be happy to see someone else put you on the right
track.

Thanks for the yarn and the learning. Phil