Income Tax Bracket

 

                Federal Marginal Tax Rate

 

                    It is important to understand how your income tax bracket (federal marginal tax

                    rate) impacts your income property taxable income.  Being in a 28% income tax

                    bracket does not mean that all of your income is taxed at 28%.   Your tax bracket

                    only pertains to hat portion of your income that exceeds the lower end of your   

                    income tax bracket range.  For example in the 2004 tax rate table below, if you

                   are married and filing jointly and you are in a 28 % tax bracket, only that portion of

                   your income that exceeds 117,250 will be taxed at 28 %.  For an income of 154,650,

                   only 37,400 of your income will be taxed at 28%.  That is 154,650 - 117,250.  Note

                   that all of your income between 58,100 and 117,250 is taxed at 25%. 

 

                   What income tax bracket (Federal Marginal Tax Rate) would you enter in the

                   On Target real estate software if you are married filing jointly and you earn

                   70,000 from sources other than income property and you are considering

                   purchasing an income property with a $20,000 taxable income?  Your

                   taxable income from all sources after the purchase of the income property

                   would be 90,000 dollars which would put you in a 25% tax bracket.  You would

                   enter 25 for your Federal Marginal Tax Rate.


                

   Tax Deductions - Tax Write-Offs

              Income Property

 

              For those of you who are new to real estate investment, it is important to have a    

              good understanding of the following tax deductions ( tax write-offs) associated

              with income producing properties.

 

        *   All Operating Expenses incurred via the operation and maintenance of an income

              producing property are tax deductible.  They include such things as accounting fees,

              advertising costs, legal fees, insurance premiums, janitorial service, lawn maintenance   

              service, leasing commissions, license fees, office supplies and expenses, pest control,  

              property management fees, property taxes, repair costs, salary and wages, snow

              removal service, misc. supplies, telephone, trash removal, vehicle mileage expenses,

              utilities, etc.

 

       *    All Mortgage Interest paid on any loan or loans secured by income property is tax

              deductible.

 

       *    All Points paid on any mortgage or loan secured by an income producing property are

              deductible over the life of the loan.  For example, if you obtain a $100,000 loan with a

              20 year term and you pay 1 point to obtain the loan, you can write-off $50 a year over

              the 20 year period for a total of $1,000.  If you sell the income property and pay off

              the balance of the mortgage early, you can deduct all unused points in that year. 

 

       *    Miscellaneous Closing Costs connected with the purchase of an income property such as   

              title search fees, title insurance, appraisal fees, loan application fees and recording fees

              are deductible in the year of purchase.

  

       *    Depreciation is the loss in value of an asset or building over time due to wear and tear,

              physical deterioration and age.  The IRS allows you to depreciate income producing

              properties over their useful life which is determined by law.  Current law stipulates that

             residential income properties must be depreciated over 27.5 years and commercial

              income properties over 39 years.  For example, you purchase a warehouse for $900.000

              in January.  The land where the warehouse resides is valued at $120,000.  The building

              is valued at $780,000.  Commercial property is depreciated by equal amounts annually

              over the 39 year period.   Since you purchased the income property in January, the IRS

              rules allow you to write-off 11 1/2 months of depreciation in the first year or $19,167, 

              1/2 month of depreciation for January and 11 full months of depreciation for the remainder

              of the year.  For the next 38 years you would deduct $20,000 a year and in the 40th year,   

              you would write-off the remaining 1/2 month of depreciation , $833, in the final year.

 

       *    Capital Improvements are subject to the same depreciation method as the building above.

              Capital improvements include a new roof, new siding, a new addition to a building, etc. 

              Capital improvements to a residential income property are depreciated over a 27.5 year

              period.  Capital improvements to a commercial income property are depreciated over  

              39 years.    

 

       *    Personal Property includes such items as furniture, appliances, lawn mowers, snow

              removal equipment, etc. which are not permanently attached to the land or improvements.    

              Depending on the type of property, a recovery period of 5, 7, or 10 should be used.        

              Check with your accountant to determine the appropriate recovery period for a specific

              type of personal property.

 Tien and Jim 

Your Real Estate Partners