Investment in real estate is also one of the most effective ways to take advantage of the available tax savings. Real Estate Investing provides you with passive income along with various other benefits like the tax deductions. Another advantage is avoiding Capital Gains with Exchange 1031 benefits.
Capital Gains Tax
Capital gains can be generated over an extended time. Because short-term capital is subject to regular income taxation, tax brackets determine whether how much of it is taxable. Most of the time, capital gains are long-term because you are holding these assets for an extended period.
Depreciation expense, which is often the largest tax deduction available to real estate investors, can be deducted to lower their tax liabilities. After investing in real estate, one’s property depreciates over time. A rental property is eligible for a write-off based on wear and tear. When you take advantage of cost segregation and accelerated depreciation, it becomes quite lucrative.
Defer Taxes with Incentive Programs
To entice investment, the government will occasionally implement a unique tax system. Let’s look at the 1031 exchange and redevelopment opportunity zones, which are two major tax benefits.
Those that reinvest their real estate profits in new deals are rewarded with 1031 exchanges, a well-known tax-saving measure. The rule allows you to swap properties for tax purposes if the new one you buy is equal or higher value to the one you sell. As a result, you will be allowed to postpone paying capital gains tax.
Deduct Your Expenses
One of the most significant advantages of this type of income stream is the ability to deduct taxes on real estate assets. You can deduct costs directly related to the property’s operation, administration, and upkeep, such as: Taxes on real estate, Insurance, Interest on a mortgage, Fees for property management, The cost of maintaining and repairing the structure, etc.
One may deduct a large portion of the costs of running your real estate investment business. Costs that qualify as qualified business expenses include, but are not limited to:
Advertising, Space for work, Equipment for the workplace (e.g., computer, stationery, business cards, etc., Fees for legal and accounting services, Travel
All of these deductions reduce your taxable income, potentially saving you money when it comes time to pay your taxes.
Use A Pass-Through Deduction
A pass-through deduction allows you to deduct up to 20% of your qualified business income (QBI) on your personal taxes. When you own rental property as a sole proprietor, via a partnership, or through an LLC or S Corp (known as pass-through entities), the money you collect in rent is considered QBI by real estate tax law.
Please note: This perk, along with other provisions, is currently set to expire in 2025.
I am not an Accountant or Tax Attorney, this blog is written based on my experience, always seek advice from your accountant or attorney.
Daniel Borrero, Jr.
Real Estate Investor since 1989