Real Estate & Investing

Jared Pomranky asked:


Investing in real estate provides ample benefits, ranging from passive income from rental properties to long-term value appreciation. However, another significant benefit of investing in Detroit real estate is the tax benefits, especially for those earners who fall into the high-income tax bracket.

Investing in Detroit Michigan real estate saves you extensively on your taxes – giving you the opportunity to use the saved taxes on more fruitful investments, or simply as an addition to your savings account.

The value of depreciation

For many investors in Detroit real estate, the most powerful tax incentive stems from depreciation. In fact, the IRS requires that all investors depreciate the value their investment properties, thus giving you a strong tax benefit.

Depreciation is a capital loss that you take on paper, which accounts for the wear and tear of the home, as well as any built-in obsolesce. However, keep in mind that the value of the land itself cannot be depreciated. Only the building structure on the property itself can be depreciable. Subsequently, as condominiums and town homes do not have any land value, the entire value of the Detroit investment property can be depreciated.

For a residential Detroit real estate investment, you can depreciate the value of the property over 27.5 years. For commercial Detroit real estate, the depreciation is calculated over 39 years.

Categorization as a “real estate professional”

If the IRS categorizes you as a “real estate professional,” which means that you invest 750 hours annually towards your Detroit investment properties, you have even greater tax benefits. In fact, if you invest this type of time, along with full participation in the management of your Detroit investment properties, then you have almost limitless tax deductions from your income taxes.

However, if you are not a “real estate professional” for your Detroit real estate, then the maximum you can deduct is $25,000 from your ordinary taxable income. However, keep in mind that this includes the depreciation value as well. In addition, should your annual income surpass $100,000, and you are not a “real estate professional,” then the $25,000 deduction begins to phase out, and after $150,000 in income, you are not subject to any deduction.

Nonetheless, you can still qualify as a “real estate professional” simply by hiring a property manager. You just need to make the major decisions, such as setting rents, interviewing tenants, and managing major expenses. However, you do not need to manage the day-to-day operating details. For the nearly unlimited tax expense deduction, this small effort may prove to be significantly worthwhile.

Value of a 1031 Exchange

Detroit real estate investments provide interesting tax benefits that are not matched by any other type of investment instrument. The 1031 Exchange allows any investor to sell a property, and then invest those proceeds into another similar asset. When this occurs, you can defer your capital gains tax.

As long as you invest your sales funds into another similar asset, you do not incur any capital gains or losses – and no other type of investment instrument can provide you with that type of tax benefit.

Deductions in Interest Expense

Another tax benefit to Detroit investment properties stems from your deduction of tax expenses. If you take on a mortgage for your Detroit real estate, then you can deduct the taxes you paid for this investment – saving you potentially tens of thousands a year in tax deductions.

Purchasing Detroit MI real estate provides ample opportunities, not only in passive rental income, “free equity” from renters, and long-term appreciation, but also significant tax benefits that can save you tens of thousands annually. No other type of investment can live up to those benefits.

Joel Teo asked:


Real estate investment is generally viewed as a lucrative career opportunity. But purchasing investment property does require a significant financial backing. Nowadays, however, the funds required to embark on a real estate investment career are easily accessible to many people in the form of an investment property loan. Therefore, you may begin investing in real estate, even if you are on a shoe string budget.

Investment property loans can be broadly classified into two categories, namely residential and commercial. Residential loan is associated with those investment properties whose predominant use is residential, and that are purchased for future appreciation and rental income. On the other hand, commercial loan is acquired for the purchase of apartment buildings (with 5 or more units), warehouses, or stores.

An investment property loan can be obtained from several sources, including banks, financial institutions, credit unions, and private brokers. These lending institutions analyze a borrower’s credit score, income and assets, in order to determine if he/she is a viable candidate for an investment property loan.

A multitude of real estate investors in the US make use of an investment property loan to acquire real estate. Doing so offers them a twofold advantage – they can enjoy the benefits of capital growth and tax deductions. Though the escalations are not anywhere near the boom of the late 1980s, property value does appreciate on a gradual basis (capital growth). Another significant benefit is that offered by “negative gearing”.

Gearing, in essence, refers to borrowing in order to invest. A negatively geared investment property is one that is purchased using borrowed funds and where the income (after expense deduction) from that investment is less than the payable interest in the course of a year. This allows a significant tax benefit for investors, as they may deduct the expense of owning an investment property (especially the interest on the investment property loan) from their taxable income.

Investment property loans come in various shapes and sizes, as per the requirements of investors. They are offered as interim, short term or long term loans. Needless to say, you must ensure that you are well aware of the terms of the loan, such as the interest rate, the time period of the loan, and the payment schedule.

In a gist, newbie investors need not have plethoric amounts of money to set out on a career in real estate, since property investment loans offer a great opportunity for them to get their feet wet in real estate.