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Property Investment Tax Benefits

Owning investment property can be extremely beneficial for your bottom line. Whether you’re a full-time investor or just dipping your toe in the water in search of passive income, owning property that can be rented or sold for a profit down the road can be lucrative. What you may not realize is that there are also an assortment of property investment tax benefits for you to take advantage of.

Use this guide to learn more about the basics of property investment tax benefits, as well as some of the new, lesser-known benefits available to today’s investors.

property investment tax benefits

Understanding Property Investment Tax Benefits

Take Advantage of Deductions

Deductions are a basic part of property investment and one of the more well-known benefits. There’s still a lot to know about deductions though, and whether you’re new to investing or a seasoned pro, brushing up on the most common deductions can’t hurt.

Here are a few deductions you may be able to take advantage of:

  • Property insurance premiums
  • Property tax payments
  • Interest on your mortgage
  • Fees paid to property managers
  • Repairs and maintenance
  • Advertising costs for rental units or property sale

Creating an LLC for your real estate holdings can help you earn other property investment tax benefits including deductions on:

  • Marketing materials like business cards
  • Office space
  • Legal fees
  • Professional accounting and bookkeeping fees
  • Communication costs, including internet and PO box payments
  • Travel costs
  • Business meals
  • Ongoing education and professional memberships

Depreciation is Your Friend

Depreciation is a valuable concept to understand as a property investor, but it can be a bit confusing. In the simplest terms, depreciation allows you to make deductions based on the expected value loss of a property over time due to basic wear and tear. You can start to enjoy the tax benefits of depreciation once you’ve owned any property for a year or more. On residential properties, this deduction is made over a period of 27.5 years. For commercial property, that number balloons to 39 years.

How does it really work? Imagine you purchase a single-family home for $400,000. Over the course of 27.5 years, you can deduct $14,545 per year. Remember that number changes to 39 years for commercial property. Major capital expenses like installing a new roof can also be deducted.

It’s important to note that depreciation doesn’t really last forever. When you sell the property, the depreciated amount is figured in or “recaptured.” It will be taxed as regular income in most cases, though there are ways to defer these payments.

Understand 1031 Exchanges

Depreciation recapture can hurt any property investor when they sell their residential or commercial structure. A 1031 exchange, named after the IRS tax code section with the same numeric moniker, can soften the blow. With a 1031 exchange, investors can sell an existing holding and buy a “like-kind property” without paying capital gains taxes or worrying about depreciation recapture right away.

The real benefit of taking advantage of a 1031 exchange is that you can change the form of your investment and watch it grow over time with the tax being deferred. There’s no limit to how many 1031 exchanges you can make. Hopefully you’ll make a profit each time you turn over a property, but you won’t be held liable for taxes until you sell for cash down the road.

What’s the big benefit of that? You’ll pay taxes only once, and if you invest for long enough, you’ll make your tax payment at the long-term capital gains rate, which is typically 15% to 20% depending on your income.

Learn About Opportunity Zones

Figuring out where to buy investment property can be downright difficult. Opportunity zones can be an excellent place to start or grow your portfolio.

As of 2020, there are 8,700 census tracts made up of distressed, remote and more rural areas that qualify as opportunity zones. To stimulate these areas, The Tax Cuts and Jobs Act allowed property investors to place capital gains earnings into an opportunity zone fund, deferring tax payments. You may even be able avoid capital gains taxes altogether if you keep your money in that fund long enough.

Learn more about opportunity zones for property investors here.  

From flipping homes to accruing investment properties that bring you lots of passive income through rental payments, property investment can be big business. You’ll maximize your profits if you understand and utilize concepts like deductions, depreciation, 1031 exchanges and opportunity zones.

Staying up on tax code changes and new incentives for property investors will also help you boost your revenue and help you save on capital gains, income and property taxes over time. As your business grows, you may find that hiring a professional accountant with vast real estate tax knowledge is in your best interest. It may even pay for itself. For now, taking advantage of these property investment tax benefits is a great way to make more money and reduce the amount you pay out at the end of the year.

property investment tax benefits

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