One of the more benefits of owning your own home specially owning rental property is taking advantage of your tax return. For the majority of homeowners this generally involves deducting interest expense and property taxes each year.

There are three major taxes that we pay by law: Federal tax, State tax and FICA tax. The percentages someone gets taxed depends on a number of different factors. But the thing you have to keep in mind is that it is a myth if you think that the more money you make the more you will get taxed in a higher bracket. If someone tells you that, then that means they have no clear understanding of how the federal tax system works.

To better understand how federal taxation works, especially the deductions, let us use an example so we can understand this better. Say, for example, our taxpayer is John. He decides to buy a house in January for two hundred fifty thousand dollars. He does not have any money for a down payment so he will have a 100% loan. He takes two loans: an 80% and a 20% loan. The eighty percent loan has 6.5% interest rate and the twenty percent has an 8% interest rate. So if you do the math, on the 80% loan he is going to be paying one thousand eighty three dollars of interest per month and on the twenty percent, he is going to be paying three hundred thirty three dollars per month.

When he bought this home there were fees associated with the transaction. And one of the fees is the origination fee that is one percent and another one percent for the discount fee. That would be a total of five thousand dollars in today’s market that we normally see the seller pay for closing cost. So even though John did not pay for this five thousand dollars directly, he can still use this five thousand as a deduction.

Again, if you do the math of the interest per month, that will be one thousand four hundred sixteen dollars per month. In a year that will be sixteen thousand nine hundred ninety two dollars plus the five thousand origination and discount fees, you will have a total of twenty two thousand nine hundred ninety two dollars he can claim as tax deduction for that year.
In fact, if you work from your home you may even get additional tax deductions as long as you meet the requirements asked from a person working from home. To qualify for tax deductions, you must have an exclusive home business area. It need not be a full room, but part of the room such as where you have your business equipment and supply. But if you are using your dining room as your business area, you do not qualify for the tax deduction since you use it both for business and personal purposes. Surely, you will be more than happy to check out how much deduction you will get out of all the advantages possible from owning a
rental property.

Buying rental properties is a good way to increase your assets. Choosing the right rental property will be challenging. One of the surest pathways to wealth through real estate has always been the acquisition of cash flowing rental properties. However, as with any business, for every successful, happy landlord there are eight or nine others who are either struggling, sitting on the sidelines, or completely washed out.

There are at least three primary advantages of rental properties sought by portfolio investors. The main one is passive cash flow; once acquired, rental properties generate income without the landlord actively working. In addition the owner typically enjoys gains from appreciation as well, as property values tend to rise over time.

And finally, the tax advantages of owning rental properties can be substantial, the primary one being claimed depreciation. Although most properties go up in value year by year, the IRS allows property owners to deduct depreciation losses from their reported income as if the property were actually declining in value. Consult your CPA or tax professional for specifics on this subject.

Buying wholesale means buying at a price where the property will cash flow today, not after improvements are made or rent is increased. The second pitfall is buying a property that is unrentable or located in a neighborhood with a soft rental market. The ideal solution is to buy properties that are already tenant occupied, but if you do buy a vacant property make sure there is plenty of rental demand in the neighborhood or better yet locate several potential tenants before you buy.

The third roadblock comes from using conventional financing and reaching your lender’s loan limit. After you have a certain number of rental properties your lender will cut you off and not loan you money to buy more. The best solution for this is to avoid using conventional financing and acquire properties by alternative financing methods, such as subject to, seller financing, or private financing whenever possible.