How Real Estate Investing Can Turbocharge Your Tax Savings | Real Estate Tax Advantages
Real estate investing is the gateway to several tax advantages critical to any prudent wealth-building strategy. As you venture into this dynamic field, the ability to curtail your tax obligations and retain more investment gains becomes paramount to accelerating your journey toward financial milestones and fortifying your financial security.
- Depreciation is a tax deduction that can offset rental income and reduce taxable income by accounting for the loss of value of an asset over time due to wear and tear. By IRS guidelines, Residential properties depreciate over 27.5 years, while non-residential properties depreciate over 39 years. For example, if you purchase a rental property for $100,000, you can depreciate it over 27.5 years, meaning you can deduct $3,636 per year in depreciation on your taxes. Moreover, with Cost segregation, investors can speed up this depreciation schedule, increasing the amount they can deduct each year.
- 1031 Exchange: If you sell a rental property for more than you paid, you will owe capital gains taxes on the profit. However, there are several ways to reduce or defer capital gains taxes, such as holding the property for more than one year and using a 1031 exchange. For example, you can defer capital gains if you sell a rental property you have held for more than one year and reinvest the proceeds in another property within 180 days.
- Passive losses: Limited Partners who are passive investors in a real estate syndication can deduct their share of the syndication’s losses against their other passive income. If they don’t have enough passive income to offset their losses, they can carry the excess losses to future years.
- Pass-through deduction: The pass-through deduction is a tax deduction that allows owners of pass-through businesses, such as real estate LLCs, to deduct up to 20% of their qualified business income (QBI) from their personal income taxes. This deduction can be significant for real estate investors, reducing their overall tax burden and allowing them to keep more of their earnings.
- Self-employment tax benefits: If you own and operate rental properties as a business, you may be able to deduct certain business expenses, such as travel expenses and advertising costs, from your taxes. You may also be eligible for self-employment tax deductions. For example, if you are self-employed and have $100,000 in net income from your rental properties, you could save $15,300 in self-employment taxes.
- Opportunity Zones (OZs) are a federal tax incentive program designed to stimulate economic development in low-income communities. Real estate investors can benefit from OZs by investing in Qualified Opportunity Funds (QOFs), specialized investment vehicles that must invest at least 90% of their assets in qualified businesses or investment properties in OZs.
As It Relates to Passive Investors
All tax benefits of a real estate investing syndication pass through to the limited partners (LPs). This is because real estate syndications are generally structured as pass-through entities, such as limited liability companies (LLCs). This means the syndication does not pay taxes on its income or losses. Instead, all the income and losses pass through to the Partners, who then report them on their individual tax returns.
We are not tax experts, so it is essential to consult with your CPA
Discuss with your CPA your specific situation and determine the full extent of the tax benefits you may be able to realize from investing in real estate. All these rules and requirements are often adjusted, so check for any new changes.
Sources:
- IRS Publication 527, Residential Rental Property – https://www.irs.gov/pub/irs-pdf/p527.pdf
- IRS Publication 542, Corporations – https://www.irs.gov/pub/irs-pdf/p542.pdf
- IRS Publication 925, Passive Activity and At-Risk Losses – https://www.irs.gov/forms-pubs/about-publication-925
- IRS Publication 544, Sales and Other Dispositions of Assets – https://www.irs.gov/forms-pubs/about-publication-544
- Real Estate Syndication Tax Benefits for Passive Investors by Willowdale Equity – https://willowdaleequity.com/blog/
- Tax Benefits of Real Estate Syndication for Passive Investors by Semi-Retired MD – https://semiretiredmd.com/blog/
- Passive Income & Taxes: What Investors Need To Know – https://www.fortunebuilders.com/5-passive-income-tax-benefits/
