Owning investment property is a tremendous wealth building strategy. Thousands upon thousands of individuals have amassed great wealth by investing in rental properties.
Unfortunately, few investment property owners learn how to leverage equity in a way that maximizes tax deductions while creating and locking in equity gains. Instead, they leave themselves open to price fluctuations in residential property market. These fluctuations can wipe out or severely reduce equity positions in property.
Housing Boom To End?
There is little doubt we are coming to end of a huge boom market in residential properties. For last four years, properties have appreciated at unheard of rates. The question, of course, is what happens when market cools off? Will we simply see a price plateau or an actual drop in prices? While nobody is sure, clear consensus is property owners should move to preserve equity while they can.
Protecting Equity Gains
Protecting equity gains in your investment property requires careful planning. This leveraging strategy is fairly simple, but can sound complex. Please keep in mind this is just an introduction to investment property tax strategy. You will need to contact us to learn more.
The investment property tax strategy protects your equity gains by separating and leveraging them. The leveraging process is best explained with an example.
Scenario 1 – Without Tax Strategy
Assume you purchased a rental property in 1999 for $250,000 with nothing down. As of July 2005, combination of loan payments and appreciation has resulted in a gain of $250,000. You have amassed wealth, but all of it is at risk. If prices drop twenty percent over next year, you will lose $100,000 of your equity in rental property.
Scenario 2 – With Tax Strategy
We are going to use same exact scenario. It is July 2005, you have $250,000 in rental property equity, but all of it is risk. You decide to implement investment property tax strategy and following occurs.