Don’t Be Passive with your Real Estate Investments

Tax professionals use the term “passive income” to describe real estate investment income because the theory is that it comes in without any work from you (similar to stock dividends). I’m not sure “passive” is the right word, because it sure doesn’t seem like it, but there are several passive elements to owning income property.

For example, when rent checks arrive that money goes to pay for things like the mortgage interest, taxes, insurance, the gardener, management fees, etc. And all these items are all deductible thus reducing your tax obligations on the property without an owner doing anything. Then there’s Depreciation (an IRS gift if ever there was one)… This too lowers your tax obligation and requires no active payment, thus making it super passive.

Other payments such as mortgage principle, although not deductible does grow your property equity slowly, over time, by paying down your loan… and this happens in a very passive way.  Sort of like “forced savings”… I heard this term recently and I love it.

But, are there ways to be more aggressive with your passive income generating investment? You bet! How about an out of state investor, owning property near your grandkids in Boise. This could turn your annual trip to see the family into a “business” trip. And when buying a new income property, some elements of the property can be depreciated over a shorter period of time (e.g. 5 years for appliances and HVAC equipment vs 27.5 years for the bldg).

Also, what if you own a property that has no mortgage? That money can be drawn out via an equity loan tax free and then used as a down payment on another place. It’s like adding another engine to the family truckster. You’d be traveling the same route (to retirement?), but with another super-efficient engine!

Suffice it to say that I’m not a fan of the word “passive” being used to describe investment property income, because ownership does require “active” management and analysis in order to truly maximize returns. So if you’re in the market for some active help in tuning your property engine(s), give Anfield a call…

And remember to always, always consult with your tax prep folks because everyone’s tax situation is different.