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Ask Dave

Buy A Rental Home To Off-set Taxes?

Allen hears three ways that rental properties make money, and buying it for a tax write-off is not one of them.

QUESTION: Allen wants to know if he should buy a rental home to off-set income taxes.

ANSWER: There are three ways a rental property makes money:

1.    If it rents for more than the payment.  For example, if the payment is $500 and you charge $700, you make $200 minus any expenses.

2.    If it goes up in value.  If you buy it for $100,000 and it goes up to $150,000, then you sell it and make $50,000.

3.    Writing off the house by depreciating it on a 27-year straight line schedule.  You take the value of the house, not the property, and divide it by 27.  If you had a $108,000 house, divided by 27, that’s $4,000 a year.  That’s how much the house is going to depreciate and that’s called a tax shelter.  You won’t have pay taxes on that. 

You should not buy a rental property just for the tax write-off.