4 Tax Benefits of Real Estate Investing
Real estate investing is a smart move to diversify your portfolio, but did you know it also provides tax benefits? Whether you are experienced in real estate investing or just getting started, it’s hard to beat the tax advantages real estate can provide.
Today, we’re going to be exploring some essential strategies you can utilize. But remember, it’s always important to consult with your own personal tax advisor before implementing them.
Cost Segregation Study
Over time, assets like real estate properties lose value. As a result, investors can use a cost segregation study to their advantage during tax season to legally maximize their after-tax returns. According to the IRS, the useful life of residential properties is 27.5 years, meaning you’re able to write-off 1/27th of the value of the property each year. If you’re in the commercial real estate industry, commercial properties are 39 years, which allows you to write-off 1/39th of the property’s value each year. This rule lets investors decrease their taxable income and reduce their liability up until their properties have fully depreciated.
Short-Term & Long-Term Capital Gains
When you sell a real estate property for profit, you may be subject to a capital gains tax. This is a tax on the difference between what you paid for the asset versus what you sold it for. A capital gains tax can come in two forms: short-term and long-term.
Short-term capital gains taxes are levied on profits from the sale of assets that have been held for one year or less. If you sell a real estate property for profit and it is considered a short-term capital gain, you will be taxed at your ordinary-income tax rate. For most people, this is a higher rate than the long-term capital gains tax rate.
Long-term capital gains taxes are levied on profits from the sale of assets that have been held for more than one year. If you sell a real estate property for profit and it is considered a long-term capital gain, you will be taxed at a lower rate than your ordinary income tax rate.
When you invest in real estate, you’re able to take advantage of tax deductions. This means that the expenses that are incurred from your operations, management, and maintenance of the property can be subtracted from the adjusted gross income on your tax form.
For rental properties, such tax deductions may include property taxes, maintenance fees, management fees, and mortgage interest expenses. You also have the opportunity to take advantage of further business-related tax deductions if you invest in real estate with an LLC or limited partnership. These include:
- Travel expenses
- Mileage expenses
- Advertising fees
- Office space
- Business meals
- Business equipment
If you own a real estate property that collects rent, you can take advantage of the pass-through deduction tax benefit. This tax benefit lets you deduct up to 20% of the qualified business income on your taxes since rental income is considered a QBC. It is important to note that in 2025, this provision is set to expire under the Tax Cut and Jobs Act of 2017.
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MRA Capital Partners offers real estate investment strategies focused on maximizing the internal rate of return through favorable deal structures and the pursuit of non-correlated investment returns. Learn more about our investment strategies by visiting us online. Also, sign up to join MRA Capital Partners’ preferred investor network to learn more about our upcoming unique investment opportunities.