How Tax Shelter Benefits Real Estate Investment Property Ownership

| November 5, 2011

Many people invest in real estate because of the income tax shelter benefits. Regardless of investment type such as apartments, commercial buildings, and rentals, all real estate investments offer large tax incentives for investors.

Tax shelter, one of the returns connected with real estate investment, benefits income property ownership. Provided by the tax code, tax shelter refers to any system of decreasing taxable income that leads to a lower tax paid to state and federal governments. Tax shelter allows a real estate investor to protect some of his income from being taxed and sometimes shelter income from other sources. With tax shelter, an investor can usually reduce capital additions starting when they are put in service. A real estate investor can pay off closing costs related to the purchase of a property. In addition to that, an investor can pay off loan points over the duration of the loan term. All these benefits are possible, thanks to the tax shelter.

For real estate investment properties that provide tax shelter, there are two permissible deductions. The first deduction is for mortgage interest. The Internal Revenue Service (IRS) allows an investor to subtract the interest he paid on the mortgage to purchase the income property. This benefits investors because the interest is in fact a cost connected with the purchase of the property rather than operating it. Tenants are the ones who actually pay the mortgage interest for the investor.

The other tax shelter source is deduction in depreciation or cost recovery. The IRS allows investors to presume that the buildings are deteriorating over time and may lose value. Thus, cost recovery allows investors to take a deduction for the supposed decrease in the value of the asset.

Category: Investment

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