For many, the crown jewel of the American Dream has been homeownership. Attractive elements of US homeownership? Beautiful land, world-class economy and, up until now, tax advantages.
In fact, up until now, Zillow tells us that 44% of all homes nationwide have been worth enough money for homeowners to utilize mortgage interest deductions. Now, however, with the doubling of the standard deduction to $24,000 for joint filers and $12,000 for single filers, Zillow predicts that only 14.4% of all homes will be worth enough for homeowners to utilize that deduction.
Real estate agents…consider opening up your strategies and businesses to clients who may now think about property ownership in new and different ways due to the new tax bill.
Tax advantages for real estate investors now far exceed tax advantages for homeowners or renters. Hence the term tenant-vesting…for people who sell their homes, invest the proceeds of that home sale into rental properties and then, in turn, rent homes to live in themselves.
What are some of the pros of tenant-vesting?
People who have lived in their primary home fro two of the last five years can sell their homes and take their profits tax-free up to $250,000 for singles and $500,000 for marrieds. People who live in nice areas can sell their homes, reinvest their profits in another area and likely double/triple their rental incomes, yields and/or cap rates. Capitalization rates in A grade areas tend to be 2-5% whereas investor grade areas can see cap rates up to 6-15%.
If new equity from a home sale is used to invest in a rental property, the person is then able to depreciate that property, unlike an owner-occupied property. Let’s say you have a $500,000 structure on a 27.5-year flat-line depreciation, you could then write off approximately $18,181/year.
Additionally, as an investor rather than an owner-occupied owner, routine and/or one-time maintenance repairs can be written off as operating expenses.
Another bonanza…mortgage interest and taxes are not included as an investor. All local property taxes can be written off as well without facing a cap.
And, by utilizing a pass-through entity such as an LLC, an investor may well find herself in a lower tax bracket than she would be as an individual for the same amount of income.
As always, real estate thinking is NOT either/or…it is either/and.