Tax shield is associated with property investment which rewards income property ownership.In this guide, I would like to introduce you to two allowable deductions for property investment properties which provide tax shelter.
The advantage to property investors is that interest is truly a cost associated with the acquisition of land as opposed to working, and the argument can be made that renters really pay the mortgage interest for the real estate agent.
The next source of tax protection is by way of depreciation deduction, which the tax code now calls cost recovery, but we will continue to call depreciation for our purposes. In cases like this, the IRS lets you assume that the buildings (not the land) are wearing out over time and getting less valuable, and therefore permit you to take a deduction for this presumed decrease in the value of your asset. Check out some ways to invest in real estate through http://www.huahin-property-agency.com/.
Although you won’t find a simple formula for the tax shelter part of a property investment, here is the idea.
To compute your taxable income, you would then deduct your mortgage interest and allowable depreciation from the internet operating income.
Unless you’ve got an interest-only loan, your mortgage payments comprise of both principal and interest. Only the interest portion is allowable, which we’ll state is $17,559.
The quantity of depreciation is dependent upon several variables: The useful life of these buildings as stated in the tax code, which is now 27.5 years for residential property and 39 years for nonresidential property, and the percentage of the investment property allocated to buildings and property. Only buildings could be depreciated, and for our purposes, we will say that the deductible amount for depreciation is $10,037.
Here is the calculation: $28,800 – 17,559 – 10,037 = $1,204
To put it differently, you must pay Federal income tax on a taxable income of $1,204.
There are different elements to a tax shelter. As an example, you may typically depreciate capital additions over the same useful life, beginning when they’re placed in service. You’re permitted to amortize closing costs related to the purchase of an investment property over the same useful life. And you can amortize loan points within the number of weeks of the loan term and write them off.