As a property owner, there are numerous tax benefits from renting out a house. Still considered one of the best ways to build wealth, investing in rental properties provides the owner with tax advantages when purchasing, holding and selling the home. In addition, if you hold a mortgage on the house, the collected rent will likely pay your debt.
The profit left over from collected rent is taxable by the government; however, you may first deduct any expenses you incur as a result of holding the home and you will further reduce your taxes by taking a depreciation deduction. This results in a much smaller profit that you must account for on your income taxes.
Becoming a landlord raises your net worth as long as you collect sufficient monthly rent and maintain your property. When determining the amount of rent, take into consideration your annual holding expenses. Add your mortgage payment, the property taxes and your operating expenses, which include maintenance on the house. Divide this amount by 12. Ask yourself if you can find a tenant to rent the property at that rate.
If you determine that a renter will pay the amount of rent that you need to cover your holding expenses on the home, you are ahead in the tax game. When you compile your income taxes, you will get another break; you will take a deduction for depreciation on the home. Depending upon the value of the home, the depreciation factor will be spread out over a period of twenty or more years. This amount may reduce your tax liability on the home to zero (see Resources below).
Finding homes that are good prospects for rentals takes careful research. You want to buy the home as cheaply as possible for two obvious reasons: your mortgage will be lower, allowing you more leeway in determining the rent, and the county appraiser may refigure your property taxes to reflect the sales price. Real estate investors find bargains at tax foreclosure sales and by reading the local classifieds, or driving the neighborhoods, looking for homes sold by their owner. Call local lenders and ask about properties nearing foreclosure.
Not all houses are good prospects for rentals. You, not your renter, is responsible for paying the property taxes, but if the taxes, when added to the mortgage, are higher than what you can comfortably charge in rent, you'll be paying the extra money out of your pocket.
Hire a tax accountant. Tax laws change nearly every year, and to get the most benefit from your real estate rental investment, you must stay abreast of the changes. Many accountants offer a free initial consultation, so visit two or three until you find one you can work with. The fee you pay for their professional services is also deductible on your income taxes (see Resources below).