Tax Breaks for Real Estate Investors
Is your tax bill bringing you down? Maybe this will cheer you up. We know that owning a home offers great tax deductions to the homeowner, but did you know about the generous tax benefits of owning rentals?
One of the best deductions is the depreciation expense. The IRS requires real estate investors to depreciate their investment properties for wear and tear even if that property is appreciating in value. Residential income property is depreciated over 27.5 years and commercial property over 39 years. If you’re in a 35% tax bracket, owning a $150,000 home in Texas, for example, could reduce your taxes by as much as $365 per month or more. A positive cash flow property is claimed as a “loss” for tax purposes, even though most investment properties go up in value every year. Hey, we didn’t make this stuff up! Talk to Uncle Sam if you don’t believe it.
If you are a "real estate professional" who meets certain time requirements and who "materially participates" in managing your investment property, you are allowed almost unlimited income tax-deductions from your investment property! Many “real estate professionals” pay no taxes. The requirement: you spend at least 750 hours and more than half of your working hours per year involved in real estate-related activities. Full-time real estate investors, brokers, property managers, builders, and contractors are examples of qualified real estate professionals.
If you invest in real estate but do not qualify as a "real estate professional", but you “actively” participate in the management of your investment property , you can take a maximum annual $25,000 realty investment property loss deduction against your ordinary taxable income. This "loss" includes the paper loss created by depreciation. However, if your annual adjusted income exceeds $100,000, the $25,000 loss deduction gradually phases out. At the $150,000 adjusted income level, the allowable tax loss deduction goes to zero. Totally passive investors get no deduction.
Personal property (chattel) in the property, such as appliances, landscaping, and cabinets are depreciated over shorter periods, typically five to 10 years. This can accelerate your tax savings.
When you sell your property, you can avoid taxes too! Rather than pay capital gains tax, you can trade your property for another property of equal or greater value through the IRS Code 1031 Tax Deferred Exchange. Many investors continue to trade up into bigger properties, while deferring their taxes.
Would you like to learn more about Real Estate Professional status, 1031 Exchanges or other Tax breaks for Real Estate investors, feel free to send me a message or leave a comment with your question.
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