Investing

1031 Exchange: Real Estate Investing Tax Advantages

Owning real estate properties offer a lot of benefits, but it is very challenging to beat the tax advantages of real estate property investing. It is an excellent way to create an additional income or diversify and expand investment portfolios.

Still, a lot of people are not aware of the excellent tax benefits that you can get from it. In this article, we will take a closer look at some tax advantages people can get from investing in real estate properties, and see if you and your bank account can benefit from these tax savings.

Deductions

Considered as the most basic tax benefits you can get when investing in this industry is the capacity to deduct or remove certain expenses that are related to investment properties like rentals that may include:

Property Management Fees

Property Insurance

Property Tax

Mortgage Interest

Capital Improvements, Ongoing Maintenance or Property Repairs

Ads expenses such as cost in listing market or rental properties that are for sale

To find out more about LLCs, check out https://www.investopedia.com/terms/l/llc.asp for more information.

A lot of real estate property investors choose to invest and own properties with and an entity like LLC or Limited Liability Company or LP or Limited Partnerships. In doing so, it opens up a lot of additional tax deductions that are related to the operation of investment businesses like:

Marketing or advertising expenses like business cards, signages for your office or mailers in finding off-market leads

Professional and legal fees such as attorney bookkeeper or accountant

Business equipment like a laptop, office desk, phones or printers

Office space that includes home offices

Communications like PO boxes, phone lines used in business operations or the Internet connection

Travel expenses such as your car’s vehicle mileage and parking fees

Membership and education like the annual fee for trade associations or the cost of a seminar, courses on topics related to your industry, or expenses for books and reading materials.

Meals (as long as it is with a current or prospective partner or client and possible business is discussed)

Most of these real estate property-related expenses, operational costs can be deducted at face value, but losses like capital improvements are depreciated as time goes by. A lot of business deductions are portions of people’s expenses.

For example, you can only subtract 30% of meal allowances, or $10 per square foot of the home office, with a maximum of 500 square feet. You need to keep records of all your expenses throughout the year, so you can get the benefits of tax savings that are available through property deductions.

Depreciation

If you bought a real estate property that is being used as an income-generating or business purposes such as rental properties for at least a year, you could depreciate the operational cost of the said property as time goes by.

Depreciation is the process of deducting the property loss in value over the expected life expectancy, which is 27.5 years in residential and 39 years in commercial properties. In essence, it is accounting for the decrease in value from the average user, as well as the wear and tear of real estate properties.

For example, if you bought a small property rental for $200,000, you can deduct a yearly depreciation of $7,272 per year (divide $200,000 to 27.5 years, which is the life expectancy of the residential property). You can also depreciate some capital expenses like installing a new Heating, Ventilation, and Air Condition system or replacing its roof for years.

It can help give even greater depreciation deductions on the owner’s annual taxes. Depreciation can be used on investment properties, making them substantial tax incentives available to investors in the real estate industry. The bad news is, depreciation does not last forever.

When real estate properties are sold, the depreciation will be recaptured. Depreciated amounts are then regained and taxed as an ordinary income with maximum tax rates of 25%. There are other ways to avoid the recapture of depreciation like 1031 Exchange, and make sure that it suits your needs.

Pass-through deduction and passive incomes

Properties are frequently praised for their capacity to produce a passive and stable income, a cash flow that is earned without continuously working for it. But these passive incomes are usually confused with passive activities.

According to the IRS or the Internal Revenue Service, these passive incomes are incomes that are earned from business or rental activities in which they do not materially participate in, but explicitly exclude residual profits that are received from passive investments like dividends or interests from mortgage notes. It means that passive incomes in the real estate industry are usually earned from rental revenues.

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