If you’re like me, you may have always wondered, “What’s the allure of investing in real estate?” Many landlords have to deal with a variety of tenants on the spectrum from perfect to destructive. However, the allure of part-time income and the additional tax benefits of owning real estate keeps property owners in the game. If you’re interested in the tax deductions real estate investors earn, now is the time to learn all about them. That way, next year you can benefit from the many tax benefits you can get from real estate investment.
Here is the obligatory disclaimer for this post. Always consult with a tax professional about your personal situation. Don’t take advice from the Internet without thoroughly vetting it with your tax advisor.
Why would you bother to invest in real estate? Unlike other self-employment incomes for which you pay additional taxes, you may not have to pay these with real estate investing. Additional tax benefits make real estate a great investment.
If you haven’t already, it’s almost time to file your taxes which means you should start getting your paperwork together if you want to take advantage of your real estate deductions. Don’t worry you still have until April 16, 2018, to file. But don’t wait until the last minute to find out about your tax benefits and deductions.
Multiple tax deductions await you as a real estate investor. To get your benefits, disclose all your investments. Not doing so could result in you leaving deductions on the table or getting audited. And who wants to deal with the IRS more than necessary?
Don’t feel bad if your property decreases in value. You can deduct depreciation on your taxes. Two types of depreciation exist, straight-line depreciation and accelerated depreciation. To find straight-line depreciation divide the property’s total value by its lifespan. Deduct this same amount each year for the property’s life. For accelerated depreciation, you deduct more at the beginning but less in later years. Depending on how long you own a property, one method may work better for you.
If you have a residential property, the IRS estimates your property loses its value completely after 27.5 years. Business properties have longer lives of 39 years. These numbers help you determine how much you can deduct for depreciation.
Don’t think you have to eat repair costs on your rental properties. According to the IRS, you can deduct any necessary repairs to keep your property in good condition. Yes, these deductions help your tax bill, but only at the end of the year. Sadly, improvements to your property do not count as deductible. Make sure to budget for necessary repair and maintenance costs throughout the year on all your properties and retain your receipts for tax time.
Capital gains and losses both count toward your tax bill. The former costs you more while the latter saves you money. The amount of tax you pay depends on how long you’ve held a property before selling it. If you have a property for up to a year and make a profit on the sale, you have short-term gains. Property held longer is classified as long-term gains. Short-term gains are added to your income, and you don’t require an additional form. Long-term gains require half your regular income tax rate. The longer you have a property, the better you’ll end up when you sell it, from a taxpayer perspective.
Capital losses don’t have to end your real estate investing dreams. You can offset $3,000 annually from other income with your losses. So, even if you lose money, it’s not a complete loss for the year. Whether you have losses or gains, report them on your taxes. You could benefit greatly from using the correct forms to file.
No, the 1031 Exchange is not a way to get out of paying taxes. Instead, it’s a means of rolling over profits from selling one property when buying another. You do have to send the IRS a form outlining the property exchange. When you do, your tax burden may be zero on the initial property. You’ll still have to pay, though, when you finally sell the second piece of real estate.
Avoid IRS issues with your property exchange by adhering to the 1031 requirements for properties.
Anything not falling under these criteria gets taxed when you file a 1031 Exchange.
Yes, it takes a lot of your time and money to invest in real estate. But if you know about the tax benefits, it’s worth it. You must be willing to keep up with your properties, the paperwork and the necessary research to maximize your investment options. Don’t forget to discuss your finances with a tax professional to determine if you really should dive into the real estate pool.