Tax Advantages Of Real Estate Investing

Tax Advantages Of Real Estate Investing

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.

  1. Tax DeductionsPaper sheet with text TAX DEDUCTIONS, calculator and open notebook on wooden table

As a real estate investor, some of the tax deductions you can enjoy include:

  1. a) Mortgage Interest – It applies to the original loan on your primary residence and 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.
  2. b) Business Expenses – Any expenses you make while managing your property and your real estate investing business will be reduced from your tax bill. You can deduct expenses from your home office, such as phone bills, internet bills, and property viewing expenses.
  3. c) Improvements And Repairs—Improvements such as roof replacement, re-installation of plumbing, 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.

  1. Depreciation

The IRS will consider the possible wear and tear associated with your property, referred to as asset depreciation. You should be able to subtract the property’s depreciating value over a few years. The rate for residential property is 27.5 years, while for commercial property, it is 39 years.

  1. 1031 Exchange

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 an exception is listed in the Internal Revenue Code section 1031.

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 cannot handle the money or the transactions. Rather, you need to use an intermediary, which shouldn’t be someone you have worked with within the last 2 years. These include accounts, real estate agents, lawyers, investment bankers, brokers, and employees.

You are disqualified from the 1031 exchange option if you don’t meet these criteria. 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 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.

Sources:

  • https://www.forbes.com/sites/forbesbusinesscouncil/2021/05/24/exploring-the-tax-benefits-of-real-estate-investing/
  • https://www.investopedia.com/articles/pf/06/rentalowner.asp
  • https://smartasset.com/taxes/tax-benefits-of-real-estate-investing
  • https://www.quickenloans.com/learn/tax-benefits-of-real-estate-investing
  • https://www.morningstar.com/funds/tax-benefits-active-passive-real-estate-investors
  • https://www.theentrustgroup.com/blog/tax-benefits-real-estate-investing

About the author

Nathan Tarrant

Nathan has worked in financial services, marketing, and strategic business growth for over 30 years. He was the founder and COO of a Queens award-winning financial services company based in the UK, and a capital investment company in Virginia USA..

He operated as a financial & alternative investment advisor to delegates of the UN, World Health Organization, and senior managers of Fortune 500 companies in Geneva, Switzerland, after the 2008 financial crash.

As an avid investor, especially in alternative investments, he runs this blog Altinvestor.net, sharing his growing experience and views on alternative investments. You can see Nathan's full profile at his personal website nathantarrant.com
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