Don’t consider this tax advice. Everyone’s situation is different and your accountant will help you develop your specific strategy. Investment property is a great place to protect you hard earned dollars.
There are four benefits to investing in real estate:
1) Income (cash flow before taxes)
2) Principle reduction (paying off the mortgage)
3) Income tax savings (self explanatory)
4) Appreciation (if you have the first three under control you are a real estate investor, if you are counting on appreciation to make your profits, you are are real estate speculator)
Without using specific numbers, consider a property that has a positive cash flow. The tenants pay rent, your mortgage and cover expenses. Your mortgage interest is tax deductible along with the depreciation on the property (which you have bifurcated with your account for the maximum advantage). At the end of the year, you show a loss for the property in the eyes of the IRS.
The IRS allows most people to shelter up to $25,000 of their “active income” earned from their job with passive losses from real estate. A self employed individual that is employed in a real estate related business (no W2 earners) over half of all their working hours and at least 750 hours a year is not subject to the $25,000 limit. Again, consult your accountant.
So in a nutshell: unless you like paying taxes, buy investment real estate. Not only will you be building towards your future, you’ll keep more money in your pocket each year. The earlier you put the property into service, the greater the deduction you will be able to create.