Tax Savings For Investment Property Owners

If you own more than one home and you collect rental revenue, there are lucrative tax breaks you can take advantage of. Pat Massenberg and her husband, Derek, own a home and three investment properties in New Jersey’s Essex County. When they bought their first home in 2000, Massenberg had expected a windfall of tax breaks but was underwhelmed by the $13,000 in property taxes and few hundred a month in interest payments that were deductible. “Even with that, we only got back $139 from the city and almost owed the state money,” she says.

When the couple bought their first investment property in 2002, “the [tax] numbers changed significantly,” Massenberg says. “In addition to the mortgage interest and taxes, any money spent on the property is deductible. If you buy a new refrigerator, if you make any repairs — that money is deductible.” With multiple rental properties, such deductions can be huge. “When you’re talking about 5% to 6% [interest payments] on a mortgage for a $300,000 home, that already gets you into tens of thousands eligible for deduction,” says New York tax accountant Aaron Reynolds.

The hitch, as Massenberg found out from her tax adviser, is that there is a limit to how much of that money can be deducted under federal guidelines. Only $25,000 of money spent on a property is deductible for homeowners with an adjusted gross income under $100,000, but the balance of those expenses can be earned into the next year. For homeowners with an adjusted gross income of more than $100,000, the deduction rate shrinks and is limited to 50 cents for every dollar over $100,000, up to $25,000 a year. So, for example, someone who made $120,000 last year and poured $50,000 into improving or repairing an investment property would only be allowed to deduct $10,000 — half the amount of their salary over the $100,000 mark.

However, there was a way for Massenberg to get a 100% deduction on money spent on the properties — become a licensed real-estate agent. She did just that in 2003, and she and her husband will see if their formula — buying distressed properties, fixing them up, and then renting them out — pays off with a big tax break when they file taxes for 2004.

Of course, getting a tax break shouldn’t be the main reason for buying investment property. But it is an added incentive. “[If you] do it right, are patient, and wait for the right property to come along, investing in real estate can be lucrative,” says Massenberg. She points out that the first investment property she bought had an $800 mortgage, and she was renting it out for double that amount. And as a property owner, she gets additional tax advantages. As the value of real estate continues to increase, home equity growth is tax-free, and property owners can borrow money against that growth, tax-free. Now that’s hard to beat.