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How Tax Shelter Benefits Real Estate Investors

How Tax Shelter Benefits Real Estate Investors

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Published by James R Kobzeff
Discover the four allowable tax shelter deductions associated with real estate investing and how real estate investors benefit as a result.
Discover the four allowable tax shelter deductions associated with real estate investing and how real estate investors benefit as a result.

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Published by: James R Kobzeff on Dec 05, 2008
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05/09/2014

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PROAPOD
®Real Estate Investment Softwarewww.proapod.com
Real Estate Investment Tax Shelter
 James R Kobzeff 
Tax shelter is one of the returns associated with real estate investment that benefits income property ownership. Thanks to the tax shelter benefits provided by the tax code, a real estateinvestment can shelter some of its own income from taxation and occasionally shelter incomereceived from other investment sources as well.In this article, I want to introduce you to two allowable deductions for real estate investment properties that provide tax shelter.The first of these deductions is for mortgage interest. The IRS allows you to deduct the interest you pay on the mortgage you obtained to acquire the income property. The benefit to real estateinvestors is that interest is really a cost associated with acquisition of property rather than operatingit, and the argument can be made that tenants really pay the mortgage interest for the real estateinvestor.The second source of tax shelter is through depreciation deduction, which the tax code now callscost recovery, but we'll continue to call depreciation for our purposes. In this case, the IRS allowsyou to assume that the buildings (not the land) are wearing out over time and becoming lessvaluable, and as such permit you to take a deduction for that presumed decline in the value of your asset.Okay, now here's what's great about real estate depreciation.Depreciation is a noncash tax shelter deduction. In full compliance with the tax code, you get adeduction that is not an operating expense and therefore does not affect your cash flow. Moreover,depreciation can shield some or all of your property's year-to-year income from taxation and insome cases when the depreciation deduction is large enough, it can even exceed the amount neededto shelter the property's own income and provide tax shelter for other investment income as well.Though you won't find a simple formula for the tax shelter component of a real estate investment,here's the idea.Incomeless Operating Expenses= Net Operating Income
©2008 James R Kobzeff. All rights reserved.

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