The ABCs of Getting a Mortgage Loan for First-Timers

Posted on: 24 August 2017

Many individuals view real estate as a practical investment option. Although an investor may eventually own multiple properties, the first acquisition always entails an extra degree of planning. Individuals in search of their first real estate investment property can often find the ideal solution in a local single-family dwelling.

An attractive aspect of investing in real estate is that home prices generally rise along with inflation. If a property is financed with a mortgage, borrowed funds effectively act as leverage as any increase in value is realized. In addition to any long-term gain due to inflation, a rental property may also qualify the owner for a current tax benefit.

Tax Loss Due to Depreciation

Rental real estate ideally generates enough revenue to create a positive cash flow. As long as rental income exceeds expenses, you have at least a break-even proposition. However, the additional allowable expense for depreciation sometimes creates a loss for tax purposes. Although passive losses generally cannot offset active income such as wages, there is a limited exception for some rental property owners.

The cost of a residential rental property is depreciated over 27.5 years. The land itself is not depreciable, so the deduction is based on the cost of the structure and any improvements. A rental-home owner who actively manages their own rental property may use up to $25,000 in losses to offset earned income. To claim a rental loss against your taxable income, you must actively oversee the rental property.

Active Rental Management

You don't necessarily have to own a pickup truck to be an active manager of a rental property. The key requirement is that you must make your own independent judgments concerning the operation of the rental activity. To be considered an active manager, you should personally perform activities such as tenant screening and oversight of repairs.

A rental property that is located fairly close to your own home is likely to be easier to manage than a more distant property. There is a standard mileage rate that can be deducted on your tax return for driving to your rental property. Expenses for repairs and maintenance are inevitable, but those services can be contracted out if you are not prepared to handle them yourself.

You don't have to be available at all hours in order to be considered an active manager of a rental property. A property agent can be available to handle some tasks, as long as you continue to make the ongoing property management decisions.