Do-it-yourself home renovators are often also property investors. My own parents-in-law do this. They buy foreclosed properties at auction or through negotiation with the bank, assess what kinds of improvements could best raise the home’s quality and value, and then do the work themselves so they’re just spending money on materials and not on contractors’ fees or labor. Once the house is move-in ready, they either lease it and retain the home as a rental property, or the put it back up on the market for a higher price than they purchased it for.
What It Takes To Be Successful
Sound easy? It’s not. Property investment takes a well-trained eye to spot possible catastrophic problems in a home, good negotiation skills, knowledge of how much homes in the area are worth, knowledge of how much value various renovations can add to a home, the ability to create and stick to a reno budget, and dedication to see a project through. Knowing something about marketing and the real estate market doesn’t hurt either.
Deducting Depreciation On Rental Properties
Here’s something an income property owner should understand: Did you know that you can deduct depreciation on rental properties? According to the IRS website, this means, “You can recover the cost of income-producing property through yearly tax deductions.” In order to do this, “Your property must have a determinable useful life. This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes.”
To decide whether your property qualifies for depreciation tax deductions, you should answer yes to the following questions:
Do You Own The Property?
Do you use the property in your business or income-producing activity (such as a rental property)?
Does the property have a determinable useful life?
Is the property expected to last more than one year?
However, the IRS says you cannot depreciate property you bought or sold (or took out of business) in the same year, nor can you depreciate “equipment used to build capital improvements.” Once you have recovered the cost of your rental property you will no longer depreciate it.
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