Top 10 Tax Advantages for Your Real Estate Investing Business
Everyone knows that buying and holding real estate is the best way to build wealth with little risk, but when you factor in the tax advantages, the case for investing becomes practically overwhelming! Here are the top ten tax advantages to real estate investing.
1. Home mortgage interest deduction – Anytime you switch from being a renter to a homeowner, you will get a huge tax break. All of the interest you pay on your home loan is tax deductible. For most of us, the interest is the vast majority of the payment. When you deduct this interest, it can significantly lower the taxes you pay each year. Of course this is only available on your primary residence, but we included it because many people view their personal residence as an investment, and if you are currently not a property owner, you should make it a very high priority to become one.
2. 1031 Exchanges – These exchanges are a mechanism created by the federal tax code to help you “trade up” your investment property without recording a gain. In essence, you are deferring the taxes on the gain, which in the long run gives you as an investor a larger pot of money to grow over time. With compounding, the reinvestment of your profits grows at a rate faster than at which it will ultimately be taxed. So when you are finally ready to “cash out” you end up with much more money than if you had paid capital gains taxes after the sale of each property.
3. Increased Cash-Flow – Investing in real estate, particularly in rental properties, can produce positive cashflow for you every month. While this extra cash may be taxable, it gives you additional flexibility, which is helpful, particularly for self employed people who have to make quarterly income tax payments. And let’s not lose sight of the fact that paying income tax on “extra money” or “new money” is the type of burden we like to have, and this is definitely an advantage.
4. Depreciation – While an exhaustive discussion of depreciation is not possible, you should know that on certain types on investment properties held long term, you get to “depreciate” the property. This means that you record, or take a “loss of value” on the property (on paper only) which reduces your current income tax burden. You can do this even while the property is in fact appreciating.
5. First Year Expensing – Is a lesser known tax benefit that can have a large positive impact on your taxes in the year that you acquire a property. In the first year that you own an investment property, there are some expenses you might run into that can be considered “first year” expenses, and the entire amount of these become income tax write-offs that year, reducing the overall amount of tax you pay that year. You don’t have to depreciate or spread these deductions out over time.
6. Long Term Capital Gains – When you hold a property for more than a year, if you sell if for a profit without reinvesting the money, meaning you actually “bank” the profits, these profits are taxed at a much lower tax rate than most other forms of income. Changes to the tax code during the eight years of the Bush administration reduced the capital gains tax rate to their lowest levels in modern history.
7. Deductions for travel to property – This falls under the category of itemized deductions, but if you travel to your property to check up on it, say, on your way to work, you may be able to deduct transportation costs. Over time, this can really add up. There are lots of rules in his area, so check with a tax professional to make sure you are following the guidelines.
8. Seller Financing – If you do decide to sell your investment property for a gain, you can defer taxes by offering seller financing. This is like taking your profits over time, in installments, and you are not taxed on income until it actually comes in – not at the time of the sale of the property. In this way you can defer income taxes for a significant amount of time.
9. Hold property within retirement account – Many people are not aware that you can use self-directed IRA’s and other type of retirement accounts to buy, hold, or sell real estate. In most cases, the profits are completely tax free, or at a minimum deferred until retirement, depending on whether or not your IRA is a ROTH IRA or a Standard IRA. You can even get financing on these properties, you do not have to pay for them in full with your retirement account funds.
10. Home Office Deductions – If you have more than one investment property, and use your home office to deal with the managing our property portfolio, you may be able to deduct a portion of many of your household expenses as “home office expenses”. Again, there are many rules here so always consult with a qualified tax professional.
As you can see, there are numerous tax advantages of investing in real estate, so we encourage you to tax advantage of them. Our team is trained t help you find the investment property that matches your wealth building goals. Contact us today to learn more.
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