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The Tax Advantages and Benefits of Investing in Real Estate

by | Sep 4, 2019

Investing in real estate is a tried-and-true way to grow wealth. However, did you know that it also has many tax benefits and advantages? It is one of the reasons why real estate investing is a popular side hustle among many professionals. To get a more precise idea of how real estate investing can help you when comes the time to fill your taxes, consult your CPA or tax professional. Nevertheless, here are some proven tax benefits investing in real estate could bring you.

  • Capital Gains taxes are lower.

Long term capital gains – such as many forms of real estate investments – are taxed lower than short term capital gains. In some cases, they can also help you lower the tax bracket in which you are included. Besides, the capital gain home exclusion tax benefit presents another advantage. Thanks to this policy, you are eligible to exclude the capital gains resulting from the sale of a property you have lived in for at least two of the past five years before selling it.

  • There are no self-employment or FICA taxes on rental income

The IRS considers rental income to be passive income unless the rental is a business. As such, it is not subject to social security and Medicare taxes. Besides, it is typically not subject to self-employment taxes unless you are a real estate dealer or a real estate complex owner who provides services to the residents.

  • Depreciation deduction from income

One of the most significant tax benefits of investing in real estate is the ability to claim depreciation on your real property. Depending on whether you own a residential or commercial building, its depreciation will be calculated over 27.5 years or 39 years, respectively. Even if the value of the property is on the rise, you can still claim depreciation.  Hence, it allows you to protect your other sources of income from taxes and reduce your tax bill.

The 1031 Exchange is sometimes also referred to as a “Starker exchange” or a “Like Kind Exchange.” Section 1031 of the IRS tax code allows real estate investors to defer the payment of their property taxes on a property until it is sold. However, the kicker is that you will need to use the profit to purchase a similar asset.

  • Refinancing allows for tax-free borrowing

As your real estate property appreciates, you can borrow against the equity you are building tax-free. Therefore, you can use this money to improve the property or even purchase new assets.

  • Defer taxes on capital gains by investing in “Opportunity Zones.”

The Tax Cut and Jobs Act of 2017 has established several “Opportunity Zones” around the United States, where the government wishes to stimulate growth and attracts new investments. Some of the policies in place to entice potential investors include tax benefits. For example, investing in an Opportunity Zone allows you to defer paying taxes on gains for nearly ten years. You could also avoid getting taxed on the profits produced by the assets in the “Opportunity Zone.”

  • You can deduct additional items from your taxes.

Finally, another tax advantage of real estate investing is the opportunity to deduct many business-related items. It includes the personal property you provide in your rental units like appliances, as well as utilities, travel costs, the cost of other services such as repairs, property management fees, etc. It all adds up! 

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