Catch a Gideon

Tax Ramifications of Owning Property

November 14th, 2006 by Endless Aspiration

I was speaking with one of my co-workers the other day about how I was trying to save up money in order to buy an investment property. We were talking about the tax rules regarding rental properties, which can get very complicated, and it was apparent that she was getting frustrated with some of my questions. Finally, she put her hands up in the air and asked “why do you want to go through all these hassles anyway? Just buy a condo like everyone else and enjoy the tax break you get for paying the interest on your mortgage.” At that point I knew that this conversation had ended. She didn’t understand where I was coming from.

It is very true. Being like everyone else and buying a condo can have plenty of advantages. The interest you pay on your mortgage is deductible if you itemize on your tax returns. That deduction has made it possible for so many people to live the American dream and own their own home.

But from my point of view that’s not enough. Owning a home increases the liabilities on your personal balance sheet. Owning an investment property is exactly what the title states, an investment. By renting out a property, you are effectively having another person help you pay down your mortgage. Every time a tenant pays you rent, they are increasing the equity you have in your property and increasing the assets on your personal balance sheet. The problem with owning a rental property is you cannot take the normal tax deduction.

Fortunately for people who are willing to go through the hassles of maintaining a property, finding tenants, doing necessary repairs, and participating in all the necessary aspects of managing a property, there is a tax break available to you. If you make money congrats you’ve made money, sorry there are no tax breaks. If you lose money the gov’t won’t make this situation worse. You can deduct up to a $25K loss from the rental property against your ordinary income. This is a huge break for all you do it yourselfers out there, because rental income is normally passive income.

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