Reaping the Full Tax Benefits of Detroit Investment Properties

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.