Many people have seen their pensions and stock market investments decline over the past two years. More and more of them have started investing in real estate, only to soon discover that strategies for investing in stocks versus real estate are different.
Here are some tips to help get you started so you can make more money with your real estate. The following three points cover your real estate investments that are not your primary home. Keep reading for tips you can use if you own your own home.
Three Ways to Get Money out of Real Estate Right Now
There are three quick ways to realize cash from your real estate investment. In this case, the assumption is that you have purchased real estate that is not your primary residence. The primary residence loopholes come later. These three streams of income come from:
- Cash Flow. This is the money you realize after you pay all expenses related to the property including the mortgage payment, insurance, property tax, maintenance and the like. If you have a property that is currently not creating a positive cash flow consider what you can do to create one. Can you increase the rents if you provide a few more amenities? Or, in the case of a vacation home, could you start renting it out? Cash flow that comes from real estate is considered passive income and is the lowest taxed income that there is. Make your property work for you…instead of the other way around.
- Tax Savings. Properly set up, the cash flow you receive from your property can be offset with "hidden business deductions" and "phantom expenses." The hidden business deductions are the items that you currently pay cash for and don't claim as deduction. You can't take advantage of deductions…unless you can find a way to turn them into a legitimate business deduction. The phantom expense is depreciation. Depreciation is a wonderful loophole that the IRS provides that reduces your taxable income without costing you money. There are even techniques for accelerating the depreciation for the first 5 -7 years.
- Appreciation. If you've bought right, and in the right area, your property will go up in value. In fact, the average appreciation in the United States has been about 6% per year. The property goes up in value while your mortgage balance goes down. That difference is called equity. You can use that equity tax-free by refinancing and taking that equity out in the form of a loan. These monies can then be used to invest in more real estate.
Homeowners – Three Real Estate Loopholes Just for You!
If you don't currently own real estate for investments, but you own a home, there are still some items to consider regarding maximizing the benefit of the home.
- Appreciation. If your property has gone up in value, consider refinancing during this period of record low rates and taking equity out of the home. If you are looking for "seed money" to get started with your own real estate investments, this could be your low-cost solution. Before you refinance just to take advantage of lower rates calculate the payback period by dividing the cost by the amount your payment will be reduced. Now, ask yourself – do you intend to stay in your home that long? In other words, if it will cost you $2,000 to refinance and your payment will only drop by $100 per month, divided $2000 by $100. The answer is 20 and that's the number of months you will need to own the home to break even on the refinance.
- Business Deduction. The IRS just cleared up the last point of issue for taking the home office deduction. If you have a space in your home with exclusive business purpose and regularly perform some kind of business function there, regardless of whether you have another office, you can take a deduction for a percentage of the home expenses. When you sell your home, you can still take full advantage of the gain exclusion discussed in the following point.
- Tax-Free Gain Exclusion. If you live in your home for two of the previous five years, you can take your gain out, tax-free up to $500,000 if you're married and filing jointly, or $250,000 if you're single. You could buy a home, fix it up while you live in it and then sell after two years. Best of all, you don't pay taxes and there is no obligation to buy another home or any limit to how many times you can do it. This could be a great sideline money-maker!
Real Estate Loopholes
The government wants us to invest in real estate. The sad fact is, they are notoriously poor at providing housing themselves. So, they have creative incentives to promote private real estate investing. That's what a loophole is – the government rewarding you for doing what they want you to.
Real estate continues to provide the best source of tax loopholes. But, there are also legal loopholes that should be closed. These are the loopholes that allow others to take your property through judgments and lawsuits. In "Real Estate Loopholes", by Diane Kennedy, CPA and Garrett Sutton, Esq., details are provided on how to open the tax loopholes and close the legal loopholes so you are successful with your real estate. For more information on this and other tax education products visit www.taxloopholes.com
Diane Kennedy is a CPA/Tax Strategist and the author of the best-selling book Loopholes of the Rich: How the Rich Legally Make More Money and Pay Less Tax and co-author of the best-selling book
Real Estate Loopholes: Secrets of Successful Real Estate Investing. For more information on how to legally use the tax loopholes and make the IRS your partner, contact Diane's CPA firm, DKA, at 888-592-4769 or www.dkacpa.com. Tax law is constantly changing! Keep up to date for free by signing up for a free e-newsletter at www.taxloopholes.com
