3 Tax Benefits of Investing in Real Estate

  • today 18 Apr 2022
  • timer 4 minutes read

Investors try to make money from investing in real estate to generate income and expand owner equity over time.

Real estate is one of the most profitable investment opportunities available. Since the beginning of time, the sector has produced many millionaires. Indeed, many financial experts consider it the ideal investment for maximising returns.

Real estate investment offers numerous tax advantages over many other income-producing assets. The three most significant tax benefits for real estate investing are listed below.

Tax benefits of investing

Deduct Your Expenses

The ability to take real estate investment tax deductions is one of this revenue stream's most significant financial benefits. You can deduct expenses directly related to the properties operation, management, and maintenance, such as:

  • Real estate taxes
  • Property insurance
  • Mortgage interest
  • Fees for property management
  • Cost of maintaining and repairing the property

Did you know that you can deduct a large portion of the costs of running your real estate investment business? Qualified business expenses can include, but are not limited to:

  • Advertising
  • Commercial space
  • Business equipment (e.g., Personal computer, stationery, etc.)
  • Legal and accounting fees
  • Travel

These deductions reduce your taxable income, letting you save money on your taxes.

Imagine your rental income is $25,000, and you have $8,000 ineligible costs. That indicates your real estate business generates $17,000 in taxable revenue. Keep complete, precise records and receipts to justify the expenses you claim if the Internal Revenue Service audits you (IRS).

Capital Gains

You may be subject to capital gains tax if you sell something for a profit, such as real estate. There are two types to be aware of: short-term and long-term. They each have diverse impacts on your tax situation.

Short-Term Capital Gains

It occurs when you earn from selling an asset within a year of purchasing it. You may have no choice but to sell, but keep in mind that doing so may result in a tax bill. That's because the gain gets counted as regular income.

For tax purposes, if you make $100,000 from your day job and sell an investment property for $100,000 profit, your income effectively doubles. If you file as a single person, the additional revenue will push you into the next tax bracket, resulting in a higher tax burden than expected.

Long-Term Capital Gains

On the other hand, a long-term capital gain occurs when you profit from selling an asset you've owned for a year or longer. You'll be able to keep more money in your pocket if you wait until the year of your purchase to sell the property.

You may not even have to pay the tax if your income is low enough. Assume you and your spouse earn $75,000 combined per year and file a joint tax return. The tax rate for long-term capital gain is 0% for your income level. That means you get to retain every dollar of the profit you make when you sell a home.

1031 Exchange

The 1031 Exchange is named because it sits in the IRS tax code (Section 1031). It specifies that on the exchange of certain types of property, such as real estate, a person may defer recognition of capital gains and corresponding Federal income tax liabilities.

You have to pay capital gains taxes upon the sale of a property. Otherwise, the government will defer these taxes.

This deduction is beneficial to investors because it allows you to roll over capital gains from one investment property to the next without being taxed until you sell the property.

However, there are a few guidelines to follow. The replacement property must firstly be equal to or greater than the old property. Secondly, the exchange should be for an asset (e.g., a real estate investment trust). Finally, the property must be "kept for productive use in a trade or company, or investment, and can be exchanged for like-kind property."

If you keep it until your death, the person who inherits it does not inherit your tax burden. They will be given the property on a stepped-up basis, which means they will be given it at its current market worth. They only pay taxes based on that present value in the future.

The only thing to remember is that if your estate is worth more than $5 million, estate taxes may apply. 

How can an Accountant help you to invest in Real estate?

Real estate is a significant commercial sector, and accounting plays a key role, like any other firm. It is sometimes referred to as an organisation's backbone because it assists in managing and optimising its financial resources. However, many real estate professionals fail to include real estate accounting in their businesses, resulting in losses.

There are numerous compelling reasons to hire an accountant for your real estate business today, ranging from tax guidance to profit analysis.

Every year, fortunes are earned and lost in the real estate market. However, only a real estate investor with the help of an accountant has a better chance of succeeding than those who do not.

Final Thoughts

If these tax advantages appeal to you, consider investing in real estate. It allows you to make a lot of money while simultaneously saving a lot on tax benefits. For many, though, the obstacle is a lack of awareness of these opportunities and how to take advantage. Having an excellent accountant can help you eliminate the stress of being updated with the real estate tax.

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About author


Sophia is a full-time financial writer at experlu. she is a passionate blogger and love to share her knowledge on various subject. Content created by Experlu– are loved, shared & can be found all over the internet on high authority platforms.