Tax advantages to real estate investing
7 Tax Advantages Available those that Invest in Real Estate
In an effort to incentivize property ownership, the government offers several tax savings to individuals who own real estate. Even if you do not own property yourself, you will still benefit from these tax savings if you invest in private real estate funds. Those funds will take these tax breaks and use them to make your returns even better. The result is everybody winning and growing their wealth together.
Whether you own a home for yourself, a rental property, or a stake in a larger real estate fund, these tax breaks will allow your investments and income to grow as quickly as possible.
Depreciation
When you purchase an asset, the IRS understands it will be subject to wear and tear. Real estate is no exception. What the IRS does to incentivize ownership despite these damages is allow you a deduction for depreciation. This deduction enables you to reduce your income every year significantly. While this is money you are not actually spending, it will deduct thousands of dollars from your tax bill.
No Payroll Tax
When you work a job or are self-employed, a certain percentage of your paycheck goes to Social Security and Medicare. For high wage earners, these taxes can reach up to 15% and cost them thousands of dollars per year. Alternatively, rental income is not subject to these taxes; thus, you or your real estate fund can enjoy extra income and have more capital to reinvest into growth. For people willing to invest a significant sum in real estate, their rental income could match or exceed the salary of a full-time job. The difference is that they will pay much less in taxes.
No Tax on Appreciation
Though rental income is usually a higher priority than appreciation, increasing value is another excellent way to grow your investment. One thing that makes it even more attractive is that you do not have to pay taxes as the value of your asset goes up. You can hold onto your property for decades while extracting rental income and never pay extra for it. You will not owe any tax until you sell that investment, and even then, there are strategies that allow you to continue to defer the taxes.
Lower Capital Gains Taxes
Capital gains taxes are very high for short-term assets, but much friendlier when it comes to assets you hold long term. Because real estate is always a long game, you will pay a manageable capital gains tax when you choose to sell your stake. The amount you pay will depend on the gains you made, but you should never pay more than 20%.
IRA Eligible
One thing that many mainstream investors don’t know is they can purchase private real estate funds in retirement accounts. The reason this is not well known is the top brokerage providers do not allow it. Fortunately, some brokerages do. This means that you can invest in private real estate while enjoying the same tax protection you do with assets like index funds.
Cost of Upkeep
When you own a property, you can deduct the various costs of upkeep from your declared income. While this might sound inconsequential to some, it can add up to a substantial amount depending on your circumstances. An example of this would be an apartment building needing a complete renovation. The building owner may have to pay out of pocket for the repairs, but they can deduct it on their taxes. If the price of upkeep is exceptionally high, they may not pay any taxes at all that year. So, you increase the value of your property with repairs and maintenance, and you get to enjoy the tax deduction of the costs. This is yet another incentive that makes real estate such an attractive option for investors.
Property Tax Deductions
The last significant deduction real estate owners can take advantage of is property tax. Property tax is a fee you pay every year based on the value of your asset. Depending on your state, this number ranges from roughly 0.5-2.4%. While this percentage may not seem like a meaningful amount, it can be significant depending on the value of the property. Though real estate investors hate to pay it, the deduction allowance serves as consolation.
When deciding where you want to invest your money, consider the tax implications of each type of asset. Careful planning and investment selection can keep you from ending up with a hefty tax bill at the end of the year. You will find that real estate offers the most tax benefits of any other asset by a significant margin. This means you keep your money working for you, generating more income and faster growth.
Rady Hubbs
Designated Broker / Asset Manager
Founder of Investment Housing Specialists / Equity 1st Home Group
Co-Founder of Legacy Investors.US
