Your Smoky Mountain Investment Cabin: The Tax Benefits
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The Tax Benefits During Ownership
As long as you maintain investment status with the IRS, expenses are generally deductible on an annual basis. This includes furnishing expenses, management fees, mortgage interest, utilities, insurance, property taxes, cable TV, phone, etc. All expenses necessary to keep your cabin producing income can be deducted from income before you pay taxes. If the expenses exceed the cabin’s income, then you have a tax loss which will shelter other similar income you otherwise would have had to pay tax on. In addition, you receive a depreciation allowance on the structure (not the land) as well as on your furnishings. Depreciation gets complicated because when you take it is determined by your gross income. This is an item you need to discuss with your C.P.A. or tax preparer, but here is an example to give you a sense of the implications of depreciation: You buy a $300,000 cabin (Land value = $75,000). It contains or you provide $15,000 in furniture and $7,000 in appliances and electronics. Your annual depreciation allowance would be: Structure: Furniture: Appliances & Electronics: Total Annual Depreciation: $8,181 per year for up to 27 ! years $1,500 per year for up to 10 years $2,333 per year for up to 3 years Yrs. 1-3 Yrs. 4-10 Yrs. 11-28 $12,014 $9,681 $8,181
I do not include depreciation in my financial analysis of cabins because there is no way for me to determine the depreciation schedule applicable to an unknown individual. Depreciation is a benefit not offered by most investments that helps make real estate investments popular and profitable
The Tax Benefits When you Sell
When you have sold your cabin and have to file taxes on the profit, you will be paying taxes on a Long Term Capital Gain. The current capital gains rate is 15%, a far cry from the rate most people pay on earned income.
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