Loving Landlords

It’s possible that no one loves a landlord (though Mr. Farley in Three’s Company was a good “straight man” for Jack’s comedy). But owning rental property has its benefits, especially when it comes to paying taxes. In addition to deducting mortgage interest, real estate taxes, and other property expenses (including assessments, if the property is a condo), you can also deduct depreciation from your taxes. This can be a significant benefit. The math can get a bit complicated, and of course you’ll need to review your own tax situation, but here’s an example.

Say I buy a one-bedroom condo for 275,000 with 20% down and rent it out for $1950 per month. The assessments are $400. The property taxes are $2750. The mortgage payment (for a $220,000 at 6% for 30 years) is $1,319 per month, of which $2702 is applied to principle in the first year.

At the end of the year, I’ve collected $23,400 in income. And paid $5,828 in mortgage payments, $4800 in assessments, and $2,750 in taxes. My net cash flow the first year is basically zero. But, I deduct long-term depreciation, which in this case is $10,000 ($275,000 divided by 27.5 years). That means for tax purposes, I have a loss of $7,298 (that’s $10,000 in depreciation minus the $2,702 in principle payments, since only mortgage interest, not the full mortgage payment is deductible as an expense.) If I’m in the 28% tax bracket, the value of that deduction is $2,043.

Bottom line, my after-tax first year profit is $2,043 in addition to which I’ve paid down the mortgage by $2,702 for a total benefit of $4,745 on an investment of $55,000, an 8.6% first year total return after taxes.

There are a fair number of variables, but even (perhaps especially) in today’s environment, where Chicago lakefront condo prices are flat, and rents are on the increase, investing in real estate for the long term can be a smart move.

An even smarter move is hiring Alto to manage your investment properties.