5 Tax Benefits of Real Estate Investing

Dated: December 14 2021

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You’ve heard that buying rental properties can produce a valuable, recurring cash flow. But, are you aware that it can also make your financial picture prettier come tax time? Read on to learn about the many tax benefits of real estate investing.

1. Deduct Your Expenses

One of the biggest financial perks of this income stream is the real estate investment tax deductions you’re able to take. You get to deduct expenses directly tied to the operation, management, and maintenance of the property, such as:

  • Property taxes
  • Property insurance
  • Mortgage interest
  • Property management fees
  • Cost to maintain and repair the building

But, did you know that you can also write off much of what you pay to run your real estate investment business? Qualified business expenses may include, but aren’t limited to:

  • Advertising
  • Office space
  • Business equipment (e.g., computer, stationery, business cards, etc.)
  • Legal and accounting fees
  • Travel

All of these deductions lessen your taxable income, which could save you money when you file your taxes. Let’s say your rental income is $25,000, and your related, qualified expenses come to $8,000. That means the taxable income from your real estate business is $17,000.

2. Depreciate Costs Over Time

Depreciation is the incremental loss of an asset’s value, generally due to assumed wear and tear. As a real estate investor that holds income-producing rental property, you can deduct depreciation as an expense on your taxes. That means you’ll lower your taxable income and possibly reduce your tax liability.

Once you sell, though, be prepared to pay the standard income tax rate on the depreciation you’ve claimed, which you can avoid if you pursue other tax strategies, like a 1031 exchange (more on that below).

3. Use A Pass-Through Deduction

A pass-through deduction allows you to deduct up to 20% of your qualified business income on your personal taxes. 

Let’s say you have an LLC that owns an apartment complex. Each year, you receive $30,000 in rental income. By using a pass-through deduction, you can write off up to $6,000 on your personal return. Of course, some rules and regulations must be followed, so please consult with your accountant.

4. Take Advantage Of Capital Gains

A capital gains tax may be assessed when you sell an asset, like a piece of property, for a profit. There are two types to be aware of: short-term and long-term. They each impact your tax situation differently.

Short-Term Capital Gains

When you profit from selling an asset within a year of owning it, you realize a short-term capital gain. While you may not have a choice but to sell, be aware that doing so can have a negative effect on your taxes. That’s because the gain gets counted as regular income.

Long-Term Capital Gains

On the other hand, you see a long-term capital gain if you profit from the sale of an asset that you’ve held for a year or longer. If you can wait until the anniversary of your purchase to sell, you’ll get to keep more money in your pocket. That’s because the long-term capital gains tax rate is significantly lower than the tax rate on income.

And, if your income is low enough, you may not have to pay the tax at all. Suppose you and your spouse make a combined $75,000 per year and file a joint tax return. The long-term capital gains tax rate for your income level is 0%. That means you can keep every cent of the profit you get when selling a property.

5. Defer Taxes With Incentive Programs

Sometimes, the government develops a special tax code to incentivize investors. Let’s review the 1031 exchange and opportunity zones, two major real estate tax benefits.

1031 Exchange

1031 exchanges exist because the government wants to reward people who reinvest their real estate profits into new deals. As long as the new property you buy is of equal or greater value than the one you sell, the program lets you swap them for tax purposes. That means you can defer paying the capital gains tax on the sale of the first property.

Opportunity Zones

Designated by the US Department of Treasury, opportunity zones are low-income or disadvantaged tracts of land. Alongside other investors, you place your unrealized capital gains into a Qualified Opportunity Fund. Money from that fund goes toward improving the selected area.

We encourage you to consider real estate as an investment when you’re trying to decide if you should buy a house. But, before you make any commitments, be sure to speak with your accountant and thoroughly inspect and research any property you’re seriously thinking about purchasing.

Ascendia Group offers a complimentary investment property consultation. Please contact us at (941) 306-4242 for more information or visit www.ascendiagroup.com.

Blog author image

Beth Dilley

I have lived and worked in Sarasota for over 20 years. As a former corporate executive, I recognize the importance of accountability and a strong work ethic. In a real estate transaction, you are the ....

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