Let us take a look at rentals as a tax avoidance strategy.
Much of the tax benefits of rentals have changed greatly over the years. If you are heavily financed on your rentals (80 percent or more), you more than likely will show a paper loss on a Schedule E Rental once depreciation is figured into the equation. The rental income is a plus. Then you get to write off the interest you paid to the bank as well as property taxes, and liability insurance. You could even carry earthquake insurance, etc. All of these insurance premiums would be deductible.
Repairs would be deductible as long as they are not considered major repairs, such as a reconstruction, room addition, or remodeling. If you re-roof a house or entire rental building, it is considered a major replacement. If you repair or replace one section at a time, it is considered repairing the roof and is all deductible. If you re -roofed the rental, it would have to be depreciated over a period of years.
Mileage – going back and forth to pick up rent checks, to do repair work, etc. – would be deductible at the 2010 business rate of 28 cents per mile. This mileage should also be recorded in a logbook with the same rules applying as previously discussed for business mileage.
The beauty of rentals is that your renters are paying off your mortgages for you, and in effect, are buying your assets. The best type of financing to get is a mortgage that will be paid off in the least number of years possible. If you can get a 15-year mortgage, do it. If you can secure a 10-year mortgage, do it. There is nothing magical about having a 30-year mortgage. The only entity it helps is the bank. On a $100,000 mortgage at 30 years, you renters are going to be paying about $260,000 in interest. The same mortgage on a 10-year not will cost only $38,000 – a savings of $222,000!
Would you not rather have your renters pay the bulk of their rent money in principal? The beauty of this principle is that the mortgage is retired earlier; then you can take the same rental income and buy another rental property. This way you can buy three times the properties in 30 years. For example, Timothy Green pays for one house rental on a 30 year mortgage for his landlord while Alice Henry, another landlord, has his renters paying off one rental every 10 years, ending up with three nice rentals fully paid for after the same 30 years. Whose example would you rather follow?
If you cannot get a 10 or 15-year mortgage or if you are taking over payments on a 30-year note, you should pay $150 per month (for each $100,000 of mortgage principal) more than the regular payment, and apply it to the principal. By doing this, your renters will have your property paid in full in 10 years.
This is not professional tax advice, but simply what I've learned throughout my real estate experience.