Top 6 Tax Benefits of Investing in Real Estate
Posted by : Admin
Buying real estate helps you diversify your financial portfolio. As the property grows in value, your wealth grows right alongside it. If you rent it out, you also get to enjoy a passive income stream. But the advantages of owning real estate don’t stop there. Investors reap quite a few tax benefits, too.
Here are the top six tax benefits of investing in real estate.
Write Off the Property’s Expenses
Tax deductions from your real estate investments can pile up quickly, making for some good news at tax time. You can deduct the mortgage interest, property taxes and insurance expenses. Pay a property management company? You can use that expense as a deduction. If you repair, replace, or renovate anything on the property, you’re able to deduct those costs, too. Even general maintenance costs (cleaning gutters, washing the windows, pest control, etc.) are deductible.
In addition to these expenses, you can also…
… Deduct the Related Costs
If you spend money indirectly related to your real estate property, it’s most likely deductible. The money you spend advertising the property is deductible. So are your travel expenses that you incurred because of it. If you use a laptop and other office equipment to manage your real estate investment, they can be deducted, too. Even part of your home can be deducted as a home office expense. However, be sure to follow IRS guidelines.
Depreciate the Costs
If you earn income from your property (for example, you rent it out), you can deduct the deprecation expense from your income taxes. The expected life of residential property is set as 27.5 years by the IRS. Divide what you paid for the property by 27.5. The number you arrive at can be deducted yearly from your taxes.
Keep in mind that if you sell the property, you’ll be required to pay the taxes on the depreciation you’ve claimed through the years. There are ways to mitigate this. The Like-Kind Exchanges Section 1031 may help you in this situation.
Be Self-Employed … Without FICA
Regular employees get to share their tax payments with their employers. Self-employed people are required to pay all of it, which can end up costing thousands of dollars every year (depending on your income).
With real estate income, you don’t have to pay FICA taxes as you do with self-employed income. In this case, owning rental property allows you to be your own boss without paying the taxes required by self-employed people in other industries.
Use a Pass-Through Deduction
Rental income is considered as passive income by the IRS. Passive income refers to income that is made with little or no effort (some landlords would loudly disagree with this assessment. That can be a topic for another day.)
This deduction, known as the Qualified Business Income (QBI) deduction, offers you up to a 20 percent deduction on income you make from qualified rental income. The pass-through deduction came about in 2017 when The Tax Cuts and Jobs Act went into effect. The IRS wrote a comparison for businesses to help real estate investors better understand this deduction.
Minimize Capital Gains
When you sell a piece of property, you may be required to pay a capital gains tax if you make a profit. Depending on how long you’ve owned the piece of real estate, it may be short-term capital gains or long-term capital gains — each with dramatically different taxes.
Short-term capital gains: This type of capital gains is in play if you sell a property for a profit within a year of buying it. From a tax perspective, this is the least attractive of the two options, as short-term capital gains is figured as ordinary income. Short-term capital gains may also push you into the next tax bracket, which requires you to pay even more taxes.
Long-term capital gains. If you own a property over a year and then sell it, you’ll pay a long-term capital gains tax. The requirements for how much you pay in long-term capital gains depends on your income. In some cases, you won’t have to pay anything and the entire profit ends up in your bank account.
Obviously, avoiding short-term capital gains tax helps you save big when you sell your real estate property.
Investing in real estate offers several advantages, from diversifying your portfolio to creating a healthy income stream to increasing your wealth. The tax benefits can be one of the biggest reasons you decide to dive into real estate investing. If you do, be sure to keep clear, detailed records to maximize your tax savings.
