Real estate investing can provide for significant tax benefits, but the trick – and often the tallest hurdle – is identifying the available strategies and understanding how and when to use them.
These opportunities are neither obvious nor transparent and can often require lengthy research. The results, however, can be well worth the effort. Taking full advantage of these tax benefits can help you build significant long-term wealth by mitigating – or avoiding altogether – certain tax obligations within real estate investing.
Is Investing In Real Estate Tax Deductible?
Yes, earning tax deductions is a primary and powerful benefit of real estate investment. For rental properties, these deductions can include (but are not limited to):
• Mortgage interest payments
• Property taxes
• Ongoing property maintenance
• Property insurance
• Independent contractors
Real estate investors can take further advantage of available tax benefits by investing in real estate through limited partnerships and limited liability companies. These structures provide for additional business-related deductions, such as:
• Professional fees
• Office space
• Travel and mileage expenses
• Real estate software tools
• Advertising expenses
• Meals
Five Primary Real Estate Investment Strategies For Tax Advantages
The tax code provides for several real estate tax strategies for minimizing tax liabilities or generating refunds. Some of these concepts are well-established and time-tested, while others are relatively recent additions. Five of these strategies are as follows:
1. Depreciation
Depreciation is the recovery of costs to maintain investment properties through annual tax deductions. Over time, the real estate will begin breaking down, and the depreciation deduction is in essence a recompense for the “wear and tear” of the property. For tax purposes, depreciation is always considered a net loss on the real estate investment independent of any profits realized on the property.
The allowed deduction amount is determined by the property’s market value, the property’s recovery period and the depreciation method used. The most commonly used depreciation method is called the modified accelerated cost recovery system, which allows investors to deduct depreciation on a residential property and commercial real estate for 27.5 years and 39 years, respectively.
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