There are several benefits of real estate investing, but the tax benefits truly set it apart from other types of investments. As you grow your investment profile, you need to build a tax shelter. This blog will highlight 5 tax benefits of investing in real estate. These tips and tricks can save you thousands upon thousands of dollars, so read along and start implementing them into your tax plan! [Click here to listen to this episode on The WealthBuilders Podcast]
1. Tax Deductible Expenses
Investors and homeowners alike can take advantage of this tax benefit of investing in real estate. There are several expenses you can write-off in relation to your primary dwelling and investment properties. These expenses include, but are not limited to: mortgage interest payments, property taxes, ongoing property maintenance, property insurance, and costs from independent contractors. When you go further in your real estate journey and develop an LLC for your investment properties, it opens the door for additional tax savings. You can write off things such as professional fees, office space, travel and mileage, real estate software tools, and advertising tools.
You can receive a depreciation tax deduction regardless as to if your property appreciates in value. Depreciation isn’t the opposite of appreciation. Rather, it is the recovery of costs to maintain investment properties through an annual tax deduction. Overtime, it is assumed that the real estate will begin to break down. The depreciation deduction is a recompense for the wear and tear of a property. It’s a paper loss in the year you declare it. This means that you are able to show it as an expense on the current year’s tax returns, but it doesn’t affect the actual cash you have to spend on the property.
3. Immunity to Certain Taxes
Real estate investors do not have to pay Social Security or Medicare taxes on their rental income. Typically, these taxes constitute of 15.3% and are split evenly between you and your employer. However, self-employed persons are responsible for the entire 15.3%. While this applies to entrepreneurs and other investors, real estate investors are off the hook! Though rental income is taxable as standard income tax, it is not subject to FICA taxes such as Social Security and Medicare taxes.
4. 1031 Exchanges
A 1031 Exchange is the exchange of one real estate property for a similar real estate property. A qualifying exchange has zero or minimal tax liabilities (unlike most asset swaps that are taxable at the point of sale.) This means that you can rollover your capital gains from one real estate investment to another. So, you can avoid taxes until you sell the property. In order to be eligible for a 1031 Exchange, you must hold that asset for one year. This is a great option that fix and flippers should consider. If you buy and hold for one year as opposed to selling immediately, you can evade the earned income taxes you would have to pay if you sold the property.
Related: Fix and Flips: 5 Keys to Get Started (Podcast)
5. Obtain a Real Estate Professional Designation
If you’re serious about real estate, you can qualify for a Real Estate Professional Designation. This certification allows you to write off the entire amount of depreciation and losses on your rental properties each year. If you don’t have this designation, the amount you can deduct as a loss is far more limited. Meet with your accountant or financial advisor to see if you qualify. They can help guide you through the process of obtaining a Real Estate Professional Designation. Typically, you can receive this designation if you spend the majority of your time (at least 750 hours a year) in real estate businesses.
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