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5 Surprising Tax Benefits of Real Estate Investing

Refuge InvestmentsOctober 1

5 Surprising Tax Benefits of Real Estate Investing

Real estate is one of the best investments that you can make. In spite of the coronavirus pandemic, home prices continue to skyrocket. In fact, U.S. home prices are up 14% this September over the past year.

The country is in transition as it begins the path to normalization after COVID-19. Thousands are moving out of densely populated areas into the suburbs. Others are taking advantage of remote working to relocate.

Mortgage rates continue to hover around record lows. As a real estate investor, you can take advantage of all of these things.

You should also consider the tax benefits of real estate investing. Read on to explore five real estate tax benefits so you can start growing your wealth today.

1. Asset Depreciation

When you are a real estate investor, your properties are considered business assets. Like other physical assets, you are able to take advantage of depreciation.

The concept behind depreciation is that a physical asset wears down over time. The property loses value due to natural causes as the roof decays and appliances become obsolete.

As a real estate investor, you will likely incur significant expense to upkeep and improve the property. This is why the IRS allows property owners to deduct depreciation from their income taxes.

There are several different ways to calculate depreciation for tax purposes. However, the general rule of thumb is that properties depreciate at a 3.6% rate over 27.5 years.

2. Expense Deduction

Real estate investors also have many different expenses. Like other homeowners, they pay for property taxes, home insurance, and mortgage interest.

They incur additional expenses that the traditional homeowner does not see. These expenses include advertising and property management for example.

Since the investment is business focused, there are also common expenses to run a company. For instance, your office and travel expenses are deductible.

But unlike homeowners, real estate investors can write off these common expenses.

3. Capital Gains

Another tax benefit is discovered at resale, when the income realized after expenses, is taxed at the capital gains rate. If you hold a property for longer than one year, you are eligible for the long-term capital gains tax rate.

This tax rate is between 15% to 20% and is substantially less than standard income taxes.  Unfortunately,  house flippers are subjected to the higher short-term capital gains rate.

4. Avoiding Payroll Taxes on Rental Income

Many traditional workers are stunned when they see how much is deducted from their paychecks. These are payroll taxes for government programs like Medicare and Social Security.

Social Security alone is a 6.2% payroll deduction. Medicare adds another 1.45% for a total of 7.65% on just these two deductions. The good news is that self-employment, and other payroll taxes are not deducted from rental income.  

And unlike a paycheck, all your expenses are paid before taxation.  Only the amount remaining is taxed.

5. Tax Deferral on Property Sales

Lastly, you can often defer capital gains tax when your property sells. This is accomplished by taking advantage of Section 1031 of the tax code.

Tax-deferred property sales are commonly referred to as a 1031 exchange for this reason. In order to qualify, you have to be classified as an investor and identify another property transaction to exchange with. You will eventually pay the capital gains tax if you sell the investment property without another 1031 exchange.

Tax Benefits of Real Estate Investing

The government encourages real estate investing through the use of tax incentives. There are many more tax benefits to take advantage of, including opportunity zones.

Refuge Investments executive team is a collection of skilled professionals in the Real Estate Investment field. We offer many real estate investment opportunities, reach out to us today to find out more.


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