If you want to pay less taxes, you should think about owning rental properties, because owning rentals gives you many tax deductions which will reduce the amount you need to pay (especially if you are an employee with a regular paycheck where you have zero control over how much taxes are taken out).
All of the expenses related to owning a rental property are deductible including interest, property taxes, insurance, maintenance, repairs, improvements, evictions, legal fees etc. Depreciation is a “phantom deduction” since you don’t actually spend any money to get the deduction. Instead, the IRS considers a single-family home to depreciate over a period of 27.5 years. So they essentially take the value of the home, deduct the land value of the lot that the home is sitting on, and then allow you to deduct 1/27th per year until there is no more depreciation left. This is one of the biggest advantages to owning real estate other than the other tax benefits as well as the benefits of amortization (your mortgage being paid off) and the benefits of leverage (using the bank’s money to pay for the purchase of your property).
One of the best tax deductions for landlords is bonus depreciation, which was introduced in the 2017 Tax Cuts and Jobs Act (TCJA). This act significantly changed the rules for depreciation and gave landlords an alternative depreciation to the 27.5 year straight-line depreciation.
The Tax Cuts and Jobs Act introduced “bonus depreciation” which allows businesses to immediately write off 100% of the cost of eligible property acquired and placed in service or business after September 27, 2017, and before January 1, 2023. That eligible property includes rental property. Last month, the bill was extended to 2026!
You are allowed to accelerate your depreciation with a cost segregation study, which allows you to take substantially more of a depreciation expense in the year that you purchased the rental property.
The Cost Segregation study identifies portions of the real property that are separate tangible personal properties subject to shorter depreciable recovery periods.
For example, the following items are considered 5-Year Assets For Depreciation:
Carpet, flooring, countertops, sinks, cabinetry, decorative moldings, specialty lighting, and dedicated outlets.
The following items are considered 15-Year Assets For Depreciation:
Land improvements, plumbing, drainage pipes, parking lot, landscaping, outdoor swimming pool.
(Disclaimer: I am not a CPA so this should not be construed as tax advice, please consult with your attorney and CPA with regards to the information in this video and your taxes).
