Tax Benefits for Real Estate Investors
If you are a real estate investor, it’s important that you understand all of the tax benefits that may be available. Our team of advisors and real estate professionals at Diversified Investment Strategies can help explain all of this in detail, and help you determine what is available to you.
Here’s a quick summary of what tax benefits may be available to you as an investor:
Deductions
Deductions are available to all homeowners, but as a real estate investor, you’re considered a business owner. So business expenses are deductible for you as well. From the mortgage interest you pay on the loan, to the paper you buy for your printer, you may be able to deduct these costs. Other possible deductions include home office space, internet bill, cell phone bill, home repairs, mileage deduction, etc.
Depreciation
As a real estate investor, you might be able claim depreciation as one of your deductions when filing taxes each year. Many investors choose to take depreciations on their investment property, because this asset breaks down over time. As a property gets older, so does the roof, siding, wood, etc. Therefore, you can take a deduction on the cost of your investment building.
Here’s a great example from Bigger Pockets: If you purchase an investment property for $100,000 and determine that 85 percent of the value is in the property and 15 percent in the land, $85,000 is depreciable. That amount is spanned out over 27.5 years for residential real estate, and 39 for commercial real estate. So divide that amount by 27.5 and you get $3,091 that is deductible each year. If you make $250 per month, you end up with an income of $3,000, and you can actually claim a loss of $91. You don’t have to pay taxes on $3,091 of your income for that year!
The downside of deducting depreciation from your taxes is that when you go to sell your investment property, you have to pay the taxes on the depreciated amount you deducted over the years, referred to as “recapture of depreciation.”
1031 Exchange
One way around paying taxes on your real estate investment property is a 1031 Exchange! This is a legal strategy that may allow you to sell a real estate investment asset and carry that revenue into a new asset without paying any taxes. Certain rules must be followed, of course. The exchange must be for a like-kind asset, it must fall within certain time limits, and you must find an intermediary to hold onto the cash while all of this takes place.
If this all seems a bit confusing to you, you’re not alone. Real estate investment taxes and tax loopholes are a complicated subject. That is why our team at Diversified Investment Strategies is here to help! Contact us with any questions you have on 1031 Exchanges and other investment tax strategies.
Bryan Hakola
Diversified Investment Strategies
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