Real Estate Investing – Are There any Tax Benefits?

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You know real estate appreciates and can be a good hedge against inflation, but did you also know there are tax benefits?

Yes, this passive source of income can lower your tax liability. Here’s how.

1.    Tax Deductions

As a real estate investor, you can take certain deductions regarding your real estate investment. Many of these deductions are the same deductions you can take on your primary residence, but then there are the deductions you can take because you run a real estate business.

Here’s a short rundown:

  • Mortgage interest
  • Real estate taxes
  • Costs to maintain and/or run the property
  • Commuting to and from the properties
  • Advertising
  • Office space you keep to run your business
  • Business equipment
  • Legal and accounting services

2.    Take the Pass-Through Deduction

Using the pass-through deduction, you may be eligible to write off 20% of your business income on your personal tax returns. This applies to sole proprietors, partnerships, LLCs, and S-corps. This benefit ends in 2025, so be sure to take advantage now.

3.    Avoid FICA Tax

When you are self-employed, you pay employer and employee taxes, aka you’re responsible for FICA taxes. However, when you own real estate, the IRS doesn’t consider it earned income, so you don’t have to pay FICA taxes.

This can leave much more money in your pocket because you avoid the 15.3% tax self-employed taxpayers owe.

4.    Take Advantage of Depreciation

When you own real estate, you can write off the depreciation costs annually or the normal wear and tear a property experiences. The IRS allows you to spread depreciation over 27.5 years for residential properties and 39 years for commercial properties.

However, when you sell the property, you’ll be responsible for depreciation recapture or the tax on the amount you wrote off.

5.    Use Long-Term Capital Gains to your Advantage

Long-term capital gains have more tax advantages because most people have a lower tax bracket for long-term gains. You just need to own the property for over one year to make the profits subject to the lower tax percentage.

Some investors may even be in a 0% tax bracket for long-term gains, making it even easier to keep more money in your pocket.

6.    Use the 1031 Exchange or Opportunity Zone Option

The IRS offers a couple of ways to defer tax liabilities on real estate investments, including the 1031 exchange and opportunity zone transaction.

A 1031 exchange means you take the profits from the sale of one real estate investment and invest it in another property like it. So you’re basically rolling the funds over into another investment instead of pocketing the profits.

You won’t pay taxes on the profits until you sell the final property and keep the cash.

Opportunity zones are special tracts of land the government wants investors to put their money into to build the area. If you invest in these areas, you can defer taxes until 2026 or later if you don’t sell the property immediately, and if you keep the investment for 10+ years, you can avoid taxes on the capital gains altogether.

Final Thoughts

There are many benefits to real estate investing regarding your taxes. If you wonder how you might benefit, contact me today to learn more! I  can help you lower your tax liability and learn how to increase your passive income.