Now, let's talk about some of the tax benefits of investing in real estate. The tax code is written to reward and encourage certain types of investments. The government understands that real estate investors are needed to provide clean and safe housing. When someone invests in real estate, the investor can benefit from depreciation. Depreciation is a "paper loss" that allows you to earn income and pay less taxes. Investors may also defer taxes through a 1031 exchange. In our underwriting, we do NOT calculate depreciation in the ROI. That means that on TOP of the ROI that we project, there are tax benefits! This is not something you want to forget.
A major benefit of investing in real estate are the tax benefits. The government has designed tax laws to reward and encourage buying real estate. Interest on the mortgage, depreciation, and others are available to real estate owners.
The government understands that investors are needed to help provide safe communities. When investing in real estate, there are several tax deductions and write-offs you can take advantage of:
For the purposes of this article, we will look at depreciation and 1031 exchange.
Depreciation is a reduction in the value of an asset due to wear and tear. This is a "paper loss" and not an actual income loss. Depreciation allows you to pay less total taxes, 100% legally. Depreciation is an investor's friend since it reduces the tax burden. You cannot depreciate land, but you can depreciate the buildings of the property.
A 1031 exchange gets its name from the US Internal Revenue Code, section 1031. A taxpayer may defer capital gains and related federal income tax liability when an investor exchanges certain property types. There are several stipulations with this but using a 1031 exchange can greatly improve an investor's returns over time.
There are many tax benefits of investing in real estate. Some investors have even completely eliminated paying taxes. This is all legal and the government allows this. Talk to a CPA, financial advisor, or lawyer for more information, as this is not legal or financial advice.