Deductions: State/Local Taxes

Deductions: Mortgage Interest

The other deduction that is a huge help is mortgage interest. If you have $160,000 mortgage you could deduct all the interest you paid that year even if it was paid by renters. The interest for that first year of $160,000 mortgage would be approximately $6,370. If we take the above example of $97,000 in income that is taxable after local taxes when you deduct mortgage interest you would only have to be taxed on $90,230.

• Taxable income (after state tax deduction): $97,000
• Mortgage Interest: $6,370
• New Tax Liability: $90,230

Deductions: Insurance, Maintenance, Repairs, Operating Expenses

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 As you can see, we are not done yet reducing you real estate taxes. Now we are on to insurance you can deduct, lets say it is $1,200 a year. Then let’s say you spend $500 on repairs/ maintenance and another $500 on operating expenses (mowing the grass/ snow removal etc.). Now you can reduce your liability by $2,200 so now you are only taxed on $88,030.

• Tax Liability (after taxes and interest deducted): $90,230
• Insurance: $1,200
• Maintenance/Repairs: $500
• Operating expenses: $500
• New Tax Liability: $88,030

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Deductions: Depreciation

Almost done with the deductions and this one is depreciation. The way depreciation works is any property you buy you can depreciate over 27.5 years or 3.636% per year. So on a $200,000 house that equals out to $7,272 per year that you can also deduct. Which if you look at in the above example would bring your tax liability down to $80,758. Big guidelines you need to follow is you have to use the property for business or income producing activity, you own the property and a few other nuanced reasons. There also are some other detailed tax implications beyond the scope of this article having to do with depreciation recapture once you sell the property. Make sure you read up on the current rules and regulations.

• Tax Liability (after taxes, interest, repairs, insurance deducted): $88,030
• Depreciation on $200,000 property: $7,272 a year
• New Tax Liability: $80,758

1031 Exchanges

A 1031 exchange can be a powerful wealth building tool and thankfully it is built right into the tax law. Essentially a 1031 exchange is a way to sell a property take that money and buy a new property without paying taxes on the sale. Now there are a number of rules surrounding 1031 exchanges. For example, you have to:

• Buy the new property for the same price or more then the sale on your old property.
• Identify a property or properties you want to buy with-in 45 calendar days of the sale.
• Close on the new property within 180 days.

I think it is clear that real estate taxes can slow down your wealth building. So here is an example of what a 1031 exchange can do for you. Let’s say you buy a property for $100,000 and it appreciates to $150,000. Now when you sell that property you can buy a new property for $150,000 or more and not get taxed. Let’s say that new piece of property appreciates to $180,000 after some minor repairs. Now you can do a second 1031 exchange and buy another property for $180,000 or more. You can continue to do that process until you decide to finally sell. Then of course you would have to pay the taxes owed but by that point you would have increased your equity and been making money on the rental income the entire time you were deferring your tax bill.

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