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Real Estate Investing Tax Advantages
Are you thinking about investing in real estate? Are you wondering about the taxes associated with real estate investing? Here’s what you need to know about the tax benefits of real estate investment.
As a real estate investor, some of the tax deductions you can enjoy include:
- a) Mortgage Interest – It applies to the original loan on your primary residence as well as refinanced mortgages, investment property loans and home equity loans. It’s also applicable to your lines of credit, insurance premiums, and any other payments done through escrow. Your mortgage lender should provide you with form 1098 to show the interest paid throughout that year and your applicable deductions.
- b) Business Expenses – Any expenses that your make while managing your property and your real estate investing business will be reduced from your tax bill. You can deduct expenses on your home office, such as phone bills, internet bills, and property viewing expenses.
- c) Improvements And Repairs – Improvements such as roof replacement, re-installation of pluming, adding extra rooms, and kitchen makeovers are tax-deductible. Repairs on the other hand such as repainting walls, fixing gutters, and repairing leaks are also deductible. You should write off the repairs immediately.
As a real estate investor, these deductions will improve your bottom line so you need to take advantage of them.
The IRS will consider the possible wear and tear associated with your property. It’s referred to as asset depreciation. You should be able to subtract the depreciating value of the property over a few years. The rate for residential property is 27.5 years while for commercial property is 39 years.
A benefit of a 1031 Exchange, and in particular a Delaware Statutory Trust(DST), is that it can be used to avoid excessive tax rates and generate a capital gain. It is a program where you can delay paying taxes when you sell the property. Remember, when you sell the property you need to pay taxes for the capital gains but there is an exception listed in the Internal Revenue Code section 1031.
Here, you can postpone tax payments as you reinvest the gains in another property. Basically, you will be exchanging the old property for a new one. It means that you are investing in your future with a tax-free income. To qualify for the 1031 exchange, you must meet the following:
- The Like-Kind Exchange – The new property must be similar to the old one in terms of character, nature, and class. For instance, you can’t sell residential property to purchase a franchise. The value of the new property should be equal or greater than the old one.
- Time-Sensitive Investment – Once you sell your old property, you should identify a replacement property within 45 days. After this, you have 180 days to close the deal on the new property.
- Qualified Intermediary – You are not allowed to handle the money or the transactions. Rather, you need to use an intermediary and it shouldn’t be someone you have worked with within the last 2 years. These include accounts, real estate agents, lawyers, investment bankers, brokers, or employees.
If you don’t meet these criteria, you are disqualified from the 1031 exchange option. You will be liable for the taxes on the capital gains. It’s a beneficial program for real estate investors because you can postpone paying your taxes. Also, you can invest 100% of the original profit after selling the old property.
That means you can buy a better and more high-valued property. It’s a great way to gain more profits and avoid a huge tax burden. It’s possible to be a real estate investor and reduce your tax liability as seen above. You need to follow the rules to avoid penalties imposed by the IRS, especially for the 1031 Exchange option.