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Estate Tax Considerations - Real Estate Investing |
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Real
estate investing naturally involves estate tax considerations. This is because it provides an opportunity for real
estate investors to generate income by means of
cash flow. This brings with it estate tax considerations..
Cash flow is the amount of money that is generated
by the property and the expenses used in the maintenance
of the real estate property.
Generally, income can be generated by investment
real estate when the property is rented out to
tenants.
The tenant will pay the real estate investor (owner
of the property) for commercial or residential
use of the property. |
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Real estate
investments also generate income from the tax-deductible
expenses associated with the real estate property.
- Interest on mortgage loans. Mortgage loan interest
can be a tax deduction. Interest accumulated by
a mortgage payment can be deducted to offset an
equal amount of annual income. The interest tax
deduction is the same for investment real estate
as it is for a home mortgage loan.
- Property taxes. Property taxes that are levied
against investment real estate property and then
paid to stat or local government can be deducted
from taxable income. The higher the property taxes
you pay, the greater your savings will be during
tax time.
- Insurance premiums. Insurance premiums covering
real estate investment properties are deductible
from taxable income. In contrast, insurance premiums
are not deductible from taxable income for homeowners.
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- Real estate property maintenance. Expenses
incurred for the purpose of maintaining any
real estate investments can be tax deductible.
Maintenance expenses can be any type of repairs
that you have had to perform on your investment
real estate.
Maintenance expenses can include things like
repairs and painting.
Maintenance costs can be very substantial
especially in older real estate investment
properties.
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A tax-deductible maintenance expense is also another
deduction that is not available to homeowner. Being
able to deduct maintenance expenses is a great benefit
for those that won investment real estate.
- Depreciation. Depreciation is the decline in
value of the real estate property over time. Depreciation
will decrease the value of the piece of investment
real estate property (on financial statements),
yet does not affect the market value of the real
estate property. Real estate investors will generally
get the maximum tax benefits by depreciating real
estate as soon as possible.
- Participation. If you own a piece of investment
real estate property, it is important to be involved
in the decisions surrounding the property. In order
to qualify for tax deductions, you need to meet
a participation requirement. Although you can hire
someone to manage your property, you need to be
involved in the major decisions like setting the
rental amounts, approving new tenants and approving
maintenance expenses.
- Real estate professionals. If you spend at least
750 hours per year involved in real estate activities,
you will most likely qualify as a real estate professional.
A real estate professional who meets the time requirements
and participates in the management of the real estate
investment property can qualify for unlimited income
tax deductions from his or her real estate investment
property.
A real estate professional should meet the 750-hour
time requirement or at least spend more than 50
percent of his or her working hours investing in
real estate. This can include managing, buying and
selling real estate property. The types of people
who generally qualify as real estate professionals
are real estate brokers, real estate sales agents,
real estate property managers, builders, contractors
and real estate leasing agents.
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