If you own a rental property, your mind should be constantly geared toward getting the most money possible out of your investment. The monthly cash flow you enjoy from rental income, the increasing value of your property as it appreciates, and the continual reduction of operating expenses are just a few of the ways you can make sure your investment is as profitable as it can be. Tax deductions are also a key way landlords get the most out of their rental property investments. Everything from insurance, repairs, maintenance, marketing, office expenses and more can be deducted to create considerable savings when tax time rolls around. In addition, rental property owners can take a rental property depreciation deduction each year.  What Is Rental Property Depreciation? The accounting term “depreciation” refers to the way an asset loses value over time. If a business owns the asset, depreciation can be used to pay for it over time instead of covering the entire cost the moment they acquire it.  The company can reduce its taxable income when taxes are due by taking a deduction for the purchase price of the asset. Their income statement will reflect this depreciation expense as a debt. The company’s balance sheet will record the accumulated depreciation as a credit. Owners of rental properties can use this strategy to improve balance sheets and tax deduction calculations. However, they have to show the IRS that their property’s useful life can be calculated. So, how do you determine the useful life of a rental property? This might seem difficult given the varying types of rental properties that exist. “How can a 75-year-old property compare to a brand new building?” you may ask. The answer is actually quite simple. The IRS has created guidelines to help you determine the useful life of a rental property, and thus, the depreciation you can claim on your taxes. According to the guidelines, the useful life of a residential property is 27.5 years. For commercial properties, the useful life of a property is 39 years. For rental property purposes, it’s important to note that a 1 to 4 unit building is considered residential property and a 5 or more unit building is considered a commercial property. How To Calculate Depreciation On A Rental Property The rental property depreciation process has four basic steps that include determining the cost basis of your property, adjusting your cost basis, dividing the cost basis by your property’s useful life, and calculating a depreciation schedule. Let’s dive deeper into each of these terms and how to calculate rental property depreciation.  Cost Basis Calculating your cost basis involves determining the monetary value of your rental property as well as some of the closing costs associated with completing the sale when you purchased it. If you purchased your rental property as an investment property, the value is simply what you paid for it. If you converted your primary residence into a rental property, you will need an appraisal to determine the monetary value.  The closing costs that can be added to the value of your rental property to determine the cost basis include: Utility Installation: The costs of installing gas, electric, water and other utilities.  Title Abstract Fees: The fee the title company charges you at the closing for a written description of the rental property you are purchasing. /  Recording Fees: All real estate transactions must be recorded by your local municipality and they charge a fee.  Legal Fees: If you used an attorney to buy your rental property, they likely charged you a fee.  Property Taxes: If you paid for the seller’s real estate taxes when you bought your rental property it can be added to your cost basis.  Back Interest Payments: If you paid for the seller’s back interest payments when you bought your rental property it can be added to your cost basis.  Agent Commissions: If you paid for any real estate agent commissions during the purchase process, you can add them to your cost basis.  Survey: If you had a survey done when you purchased your rental property to determine the property boundary, you can add the cost to your cost basis. Once you add all the applicable costs outlined here to your property’s monetary value, you have determined your cost basis.   Buildings and Land It’s important to note that buildings can depreciate but land cannot. As a result, you need to separate the value of the land you own from the value of the rental building you own to find your cost basis. If you know the fair market value of the building and the land when you bought the rental property, simply use the value of the building for your cost basis. If you don’t know what was the fair market value of each when you bought the property, you can use the amount assessed in the tax records.  As an example, let’s say you purchased a rental property for $300,000 and you find out from the tax assessment that the value of the property is $280,000 ($250,000 for the building and $30,000) for the land.  So, 89 percent ($250,000 divided by $280,000) of your sale cost ($300,000) would be your cost basis for the building. This would come out to $267,000 (89 percent of $300,00). Adjusted Cost Basis Once you have figured out the initial cost basis, you need to adjust it. Depending on a variety of factors, your cost basis may increase or decrease once the necessary adjustments are made. Renovations, repairs, or additions you paid for before renting the property can be added to your cost basis. Legal fees can be added as well.  If you received insurance payments for loss, theft, or damage to the property, those need to be subtracted from your cost basis. If you got paid to grant an easement (letting a neighbor use your property for a driveway to their land, for example), that needs to be subtracted as well. Example Of Rental Property Depreciation Let’s use

Creating a limited liability company ( LLC) for your rental property business can provide you with many benefits, including saving some money during tax time.

Here, we will cover what an LLC is, why you might need one, how to set it up, what the tax benefits are, and some of the pros and cons of creating an LLC for your rental property. Read on to get informed about LLCs for rental properties so you can decide if creating one is right for you.

If you’ve watched any HGTV lately, you’ve probably heard the term fix and flip more than a few times. Watching people purchase, improve, and then sell homes has become a pastime for many Americans. And for good reason: fixing and flipping is a great way for a new real estate investor to grow their cash position quickly. Holding onto an investment like an apartment building or retail location can take a long time to pay off. Fix and flips can generate cash much faster. This lower barrier to entry is attractive to many investors as they start their careers in real estate. But how do you find the right house to flip? And once you’ve found it, how do you purchase it, fix it up, and sell it? What is a Fix and Flip? A fix and flip is the process where an investor buys a property, fixes it up, and then sells it at a profit. This strategy has been popular for many years, especially in years when the housing market offered low property sale prices.  The principle is pretty simple: Find a home that needs some work, do the work that needs to be done to increase the value, and sell it for a much higher price than you bought it for. This is pretty simple to understand, but the execution requires a complete understanding of the process, especially how to find houses that are good fix and flip candidates.  Why Fix and Flip? When done correctly, a fix and flip can result in large financial gains. For example, let’s say you purchase a property for $200,000 and make renovations that cost you $50,000. If your cost to sell (real estate agent commissions and closing costs) is $30,000 and you sell it at a price of $350,000 that’s a profit of $70,000. Not bad for 6 or so months of work.   Beyond the financial gains, many people enjoy the process of fixing and flipping as well. Searching for that “diamond in the rough” and turning it into one of the nicer homes in the neighborhood can be very rewarding.  How to Fix and Flip? Start by creating a fix and flip business plan. This includes analyzing the market where you are looking at property, creating a timeline for the flip, crunching the numbers to create a financial plan, securing financing, and trying to foresee any obstacles that might arise.  Learning how to fix and flip also means learning how NOT to do it. There are quite a few pitfalls to avoid (more on those later) so learning about them upfront will set you up for success. Find the Right Property As you might imagine, the most critical part of the fix and flip process is finding the right property, to begin with. The key is finding a property that needs enough work that you can increase the value but not so much work that you are going to sink too much money into and not make enough profit when you sell.  Beyond the house, the location is just as important, maybe even more. Flipping in a desirable neighborhood is a great way to ensure that a large swath of potential buyers will be interested in the home once you fix it up and list it for sale.  Foreclosures When a homeowner can’t afford to pay their mortgage, sometimes they go into foreclosure. This means the bank puts the home up for auction to try and recoup the money they lent the borrower to buy it.  The auction is offered at your local county courthouse. This is a good place to find potential flip properties because they are often priced well below their market value. Before you attend a courthouse auction, check the local papers for the properties that will be auctioned off. This way, you can research the properties ahead of time. Tax Sales When a homeowner stops paying their property taxes, eventually the county tax collector will sell the property at auction to recuperate what the county is owed in delinquent taxes. These auctions are published online and in local newspapers. Often times houses sold at tax auctions need a lot of work and are good candidates for a fix and flip. MLS Sites like Zillow and Realtor.com take listings from the multiple listings service (MLS) and feed them into their sites for consumers to peruse. The MLS is the real estate agent online system where agents list properties for sale.  For sale by owners (FSBOs) can list their properties on the consumer-facing websites as well. In addition, listing agents and homeowners can promote their listing on these sites up to 30 days before they officially go on the market.  Expired Listings When a home listed for sale sits on the market too long without an accepted offer it can sometimes expire. Searching for these on the MLS can result in great possible fix and flip properties. When a listing expires, sellers often become anxious and more motivated to sell. This means they may accept an offer at a reduced price. If you go this route, make sure you research why the home didn’t sell when it was originally listed. If the house needs to be fixed up to sell, that’s a great flip opportunity. If the lack of selling had to do more with the location, not so much. Leverage Your Network For any success in the real estate industry, networking is critical. The grocery store, golf course, community groups, and any other places people gather are full of potential property buyers and sellers.  For flips, network with the types of professionals likely to have the inside track on a possible deal. This includes attorneys, lenders, and real estate agents, among others.  Public Records Local government records indicate when houses were sold, the price, and any foreclosures or distressed properties that might be available. In addition to foreclosures, these records will have a list of short sales and pre-foreclosures as well.  Location is Everything You