Investment PropertyReal estate held as a financial investment
Real estate held as a financial investment
Investment properties are defined as properties acquired with the intent to generate a rate of return on the investment, either through rent, the sale of the property in the near or long run, or both. Investment property may be a long-term venture or an intentional short-term investment, such as in the case of flirting, in which property is acquired, converted or refurbished and profitably disposed of.
The way in which an investment property is used has a material effect on its value. Sometimes analysts carry out research to identify the best and most lucrative use of a property. It is often called the highest and best use of the property. If, for example, an investment property is classified for both business and private use, the developer will weigh the merits of both until he determines which has the highest yield and uses the property in this way.
Whilst borrower providing a homeowner' home finance facility have easy recourse to a range of funding sources, such as FHA lending, VA lending and traditional lending from a wide range of financial institutions, in most cases it is more difficult to obtain finance for an investment than for a homeowner's home. Specifically, underwriters do not offer mortgages on investment property, so borrower must have at least 20% less to ensure investment property funding from bankers.
In order to grant mortgages on investment properties to debtors, however, a bank insists on good creditworthiness and relatively low loan-to-value ratio. Certain creditors also demand that the debtor has sufficient economies of scale to meet six months' expenditure on investment property. The Internal Revenue Service (IRS) requests that when an advertiser withdraws rental from an investment property, it reports the rental as revenue, but the IRS also allows it to deduct significant expenditure from this amount.
If, for example, a lessor earns $100,000 in rental over the course of a year but spends $20,000 on repair, turf care and related costs, he will show the $80,000 differential as self-employment revenue. When a person disposes of an investment property for more than the purchase of the property, they have a principal profit and must declare this profit to the IRS.
From 2017, equity gain on an asset retained for at least one year is deemed to be a long-term gain and is subject to a 15 per cent tax with the exception of those that are married and have a taxpayer's interest of more than $450,000 or individually and have an interest of more than $400,000, in which case the tax is 20 per cent.
Conversely, a tax payer who buys his principal place of residency must only declare $250,000 in profits if he submits separately and $500,000 if he submits together. Proceeds from the sale of an investment property are measured as the sale proceeds less the consideration paid for the property less any significant improvement.
As an illustration, think of an individual who purchases a property for $100,000 and invests $20,000 in new sanitation installations. Some years later, he sold the property for $200,000. Having deducted his upfront investment and equity repair, his profit is $80,000.