By Walt Harvey (R), ABR, CRS, GRI, SRES, e-PRO

Tax time is here! What a terrific time to put a plan in place to ease next year’s burden. If not now, when?

Last month we discussed the tax benefits of owning a home as a primary residence. Now let’s consider the benefits of "landlording".

Again, three caveats are in order. One: "a real estate broker is the person qualified to advise on real estate transactions. If you desire legal or tax advice, consult an appropriate professional." Two: "Never make a decision based solely on the tax consequences." Three: Federal tax codes differ from Hawaii State tax codes. Consult with your tax professional.

Rental property can be a terrific investment, tax and retirement strategy for the small businessperson. Single family homes and condos and small apartment buildings acquired over time and properly managed can be a source of cash flow, equity to borrow against and yearly tax benefits. Plus, you can sell or exchange your property when it makes financial sense to you.

Owning rental property, whether a single family home, a condo or a small apartment building can be a daunting prospect. The thought of the late night call from a tenant with a backed-up toilet keeps many from enjoying, yes enjoying the benefits of owning investment real estate. The good news is you don’t have to manage it yourself! There are professional property management companies that screen tenants, collect rents, take the late-night calls, handle repairs and complete the reports. They’re adept at making sure the property is maintained and getting out any unsavory folks if necessary. Along with the property taxes, mortgage interest, "depreciation", homeowners/maintenance fees and repairs, their management fee is deductible as a business expense. A professional, experienced property manager should be a critical member of your financial team along with your attorney, CPA and real estate broker.

Another terrific tax benefit of owning residential rental property is "depreciation". The IRS allows you to treat the property "improvements" (the building, not the land) as though they have an economic life that declines every year. Depreciation is a "paper loss" and you’re required to take the deduction. You deduct it even though the property’s market value may be actually increasing and you’re required to "re-capture" the depreciation when you sell or adjust your "basis" if you exchange. Call your tax professional for explanation.

Selling a rental property has advantages as well. You can exchange it under IRS Section 1031 and defer the gain, sell it using an "installment sale" to shift taxes on the gain to subsequent years, or sell it and pay a reduced capital gains tax on your profit. Caveat again! Consult your tax advisor to explore the method that best suits your circumstances.

A final thought. The majority of all wealth in this country has come from real estate investment. Are you fully invested in your own future?

Published in Small Business Hawaii News, April 2004

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