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Real estate investing offers extraordinary tax advantages not available with othertypes of investments. You will have little, if any, taxable income from your investment in real estate before you sell it. In addition, when you sell your real estate investments there are many opportunities to defer the gains. Below are some highlights of the tax advantages available to real estate investors.
| "Landlords grow rich in their sleep." - John Stuart Mill |
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Basic Deductions: Nearly all expenses associated with the purchase, sale and management of the property are tax deductible. Some of the common deductions related to real property include: closing costs, mortgage interest, travel expenses, repairs & maintenance, property taxes, homeowners association fees, advertising, insurance, supplies, management fees, and utilities.
Depreciation: Depreciation is an extremely valuable deduction available for real estate investments! The value of the structure on a property (not the raw land) is “depreciated” evenly over 27.5 years. This deduction costs the investor NO CASH and it offsets most, if not all, of the rental income generated from the property. Depreciation can often exceed the amount of income generated and allows the investor to show a loss on the investment, even while it generates positive cash flow. For example, a home is valued at $200,000, and $150,000 of the value is related to the structure. The annual depreciation is $5,455 ($150,000 / 27.5). If the home cash flows $200 a month for an annual positive cash flow of $2,400, the investor will pocket the $2,400 cash and still claim a loss on the investment of $3,055 ($5455 - $2,400).
| "Every person who invests in well-selected real estate in a growing section of a prosperous community adopts the surest and safest method of becoming independent, for real estate is the basis of wealth."
- Theodore Roosevelt (1858-1919) |
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$25,000 Write-off for Rental Real Estate: Generally rental real estate is considered a passive activity and losses from passive activities can only offset income from other passive activities. Meaning, a part time investor can not use real estate losses to offset other income from your regular job or spouse’s job. An exception to this rule exists for rental real estate. When the investor actively participates in basic management decisions, up to $25,000 of losses, including depreciation can be taken to offset income from salaries or other investments. Active participation is satisfied without substantial involvement and while using a property management company.
Loss Carry Forward: Since passive losses can only be used to offset passive gains, you cannot typically use 100% of your losses on real estate in the current year. However, all of these losses can be cumulatively carried forward to offset the gain on the sale of your real estate investments. Using the depreciation example above, the $3,055 loss will be carried-forward to offset the gain on the sale of your property.
| "The best investment on Earth is earth." - Louis Glickman, American Business Executive |
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Real Estate Professional Status: If the investor spends most of his time in the real property businesses, he is considered a real estate professional. This allows an investor to deduct all losses in the current year to offset any other income. That includes income from his employment, or earned by a spouse. Using the depreciation example above, the $3,055 loss will be used offset other income earned by the investor in the current year. The Real Estate Professional requirement is satisfied if the investor or spouse spends 750 hours or more in the real property business.
1031 Exchange (Like-Kind Exchange): A 1031 exchange offers investors the opportunity to defer taxes on real estate gains by reinvesting the gains in similar real estate investments. When a property is sold through a 1031 exchange, the investor can claim ZERO gains if the proceeds are re-invested within 6 months. This is a powerful tool for the serious long-term real estate investor, as it can produce significant tax deferrals and savings. |
| "Real estate is an imperishable asset, ever increasing in value. It is the most solid security that human ingenuity has devised. It is the basis of all security and about the only indestructible security."
- Russell Sage |
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* We are not Tax Professionals and this information should not be considered tax advice. Please consult a Tax Processional for clarification on specific deductions and how they apply to you.
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