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Is Real Estate Investment Tax Deductible?

Real Estate investing may offer significant tax advantages. Tax deductions are actually a significant advantage that real estate owners gain from making new investments in single-family homes, multifamily housing, and other types of Real Estate. Understanding how these investments could affect your income taxes is important if you’re thinking about purchasing an investment property or adding a rental property to your portfolio.

 

Top 6 Tax Advantages of Real Estate Investing

 

The following are just a few of the top tax advantages that come with real estate investment.

 

1. Tax-Deductible Costs

 

Many common costs incurred by Real Estate investors are tax deductible and can be written off from your taxes. This suggests that you won’t have to worry about paying for these expenses through government taxes.

In reality, some would-be real estate investors employ the house hacking technique to multiply tax deductions as homeowners can take advantage of higher tax deductions while using their personal dwelling as an investment vehicle. Depending on your real estate ownership and company activities, a few of the many typical tax-deductible expenses that you may be able to use in real estate investing include:

 

  1. Home loan interest
  2. Tax on real estate
  3. Homeowners’ insurance
  4. Fees for property management
  5. Maintenance and repairs to buildings
  6. Approved business costs

 

2. Depreciation 

 
Depreciation is a method for calculating the wear, tear, and degradation that an asset experiences over time. It essentially gives real estate investors a way to deduct taxes from rental properties, which invariably experience negative effects from usage over a lengthy period of time.

Depreciation is computed by determining the asset’s useful life and then calculating the amount of value that is lost each year using a formula. When everything is finished, you can deduct the annual amount from your taxes, which can assist reduce your taxable income.

 

3. Pass-Through Deduction and Pass-through Income

 

For real estate investors, small business owners, and self-employed professionals, the Tax Cuts and Jobs Act of 2017 created a useful tax deduction. This deduction is often referred to as a pass-through tax deduction or qualified business income (QBI) deduction.

According to the QBI, qualifying parties can deduct up to 20% of their qualified rental income from revenue received from pass-through business structures, such as partnerships, sole proprietorships, S-corporations, and limited liability companies (LLCs). The Internal Revenue Service (IRS) frequently classifies real estate revenue collected in this manner as passive income, despite the fact that finding tenants and collecting rent consistently can be time-consuming.

As a result, depending on the kind of property you own and how it is used, you can be qualified for additional tax breaks and deductions.

 

4. Capital Gains Tax

 

You have probably heard about capital gains tax if you are currently investing in real estate or are considering doing so. In essence, whether it be single-family homes, multifamily housing, apartment/condo buildings, or other properties, whenever you sell an asset that increases in value, you may be forced to pay taxation of the earnings from that investment.

The capital gains tax, which is often levied on investment gains, might change depending on your income, the length of time you’ve owned the item and your tax filing status.

 

5. Reward Programs 

 

Real estate investors might also be eligible to take advantage of various tax incentive programs depending on how they set up their investment portfolio and property ownership. The eligibility for these incentive schemes is limited, but they do allow you to enjoy significant tax savings on eligible assets and income.

 

1031 Exchange

With a 1031 exchange, you can buy or sell a business or investment property without having to pay capital gains taxes on the difference. The trade must, however, be carried out properly and in accordance with IRS regulations. Your replacement property must be of the same kind as the original and cost no less than twice as much as the sold property.

 

Possibility Zones

Opportunity zones are a mechanism by which the government encourages people and companies to invest in particular localities in order to foster economic growth. They were established as a result of the Tax Cuts and Jobs Act of 2017.

 

6. Independent Work FUTA Tax

 

According to the Federal Insurance Contributions Act (FICA), 15.3% of Social Security and Medicare income taxes must be paid by self-employed people. However, despite being partially taxable under the rules for normal income, rental income is exempt from FICA taxes.

The IRS will know how much rental income you have made and how to apply taxes when you file a Schedule E tax form. Although Schedule E income is often exempt from self-employment taxes, real estate investors should be aware that some rental operations could result in self-employment taxes.

 

Conclusion

 

Whether they are seasoned pros or just getting started, real estate investors may benefit from a number of tax breaks. You might be amazed at how many tax deductions are available, regardless of whether you’re looking to purchase a single rental property or build out an entire portfolio of multifamily or multi-unit buildings.

Due to these numerous benefits, it pays to plan strategically when structuring assets and to consider how potential tax incentives may affect your financial strategy.

 

Are you interested in learning more about Is Real Estate Investment Tax Deductible?

Then, Schedule a free strategy call with us.

 

 

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