Wanting A Tax Shelter?
Terry wants to use a property of his to get a tax shelter by building a home. What's Dave got to say about it?
QUESTION: Terry owns some property and is debt free except the house. They want to get a tax shelter by building a home there. Is that a good idea, if they pay cash? Dave breaks this down for her and walks her through it.
ANSWER: You can take the capital improvements, the actual expenditures, and they’ll be straight-line depreciated over 27 and a half years. That will be what your tax write-off is versus the income that you create on the rental property. So you can shelter some or maybe all of the income. It’s not a bad thing to do, especially if you’re doing it with cash.
If you have a $270,000 improvement, you have a $10,000 a year write off on a property that will probably earn $30,000 a year. If you make a $135,000 improvement on the lot and it rents for $1,000 a month, you’ll probably shelter the income you create on the rental. Don’t expect the shelter to reach over and cover much of your personal income. It will probably just shelter your rental property income.
I don’t think it’s a bad investment, but it probably won’t be enough to replace your job income or shelter a bunch of other income. But if you do it with that expectation, I don’t think you’ll be disappointed.