Thursday, August 18, 2005

So You Want to Be a Landlord - Tax Benefits

Category: Tax Law and Planning, Financial Planning

I have discussed here before some of the risks with owning rental real estate in your own name ("Rental Real Estate - What are the Risks?") - it should be titled to an LLC or some other entity to create a barrier between your personal assets and the property. As a general rule, if rental real estate is owned by an LLC, the LLC is the only entity that is liable in the event of a lawsuit, and only to the extent of its assets.

The article - Tax Matters: So You Want to Be a Landlord discusses the income tax benefits of owning rental real estate (as opposed to purchasing real estate to fix up and flip).

"But the real kicker is that you can depreciate the cost of residential buildings over 27.5 years, even while they are (you hope) increasing in value. Say your rental property (not including the land) cost $100,000. The annual depreciation deduction is $3,636, which means you can have that much in positive cash flow without owing any income taxes. That's a pretty good deal, especially after you own several properties. Commercial buildings must be depreciated over a much longer 39 years, but the write-offs will still shelter some cash flow from taxes. "

Since an LLC is a pass-through entity for tax purposes, if the rental real estate is owned in an LLC, the tax benefits will flow through to your personal return.

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At 2/10/2006 4:58 PM, Blogger mmonley said...

I have a duplex and have read and heard I should not own it in my own name so I created a LLC with my wife and father-in-law and Quit Claimed the property to the LLC so now the LLC owns the duplex yet I personally still have the mortgage in my and my wifes name. I understand the Due on Sale clause and decided to take my chances. Now the tenants write the rent to the LLC and the leases have the LLC and I have a seperate bank account for the LLC and am running that as a seperate entity except the LLC pays the mortgage each month. When tax time comes I report the mortgage interest and all that on my personal taxes because I have the mortgage in my name. The LLC really makes a small monthly profit but because of depreciation and write offs it does not show come tax time. The LLC also pays the mortgage so how should that look? I am not really leasing the property to the LLC as the title is in teh LLC name.
thanks for any insight into this.


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