Are you exploring the idea of investing in real estate? It’s a great way to break into investing as a novice. If you learn which tax deductions to take advantage of, you can make money and build your wealth.
The IRS considers investment real estate a passive activity. These activities are subject to lower capital gains taxes than active income. The tax benefits of real estate investing can help you grow your wealth if you play your cards right.
Keep reading to learn more about the tax advantages of real estate investing. Let’s get started!
1. Tax-Deferred Growth
When an investor holds an investment for a long period of time, the investment has the potential to increase in value, providing tax-deferred growth. This means that the investor does not have to pay taxes on the growth of the investment until it is sold.
This can provide a significant advantage to the lender, as they can delay taxes on the growth of their investment and potentially receive a lower tax rate when they do sell the investment.
2. Depreciation Deductions
Depreciation is a way of allocating the cost of a physical asset over its useful life. This means that the value of the asset is spread out over the years it is used, instead of being taken as a lump sum upfront.
This can have a big impact on your taxes since it lowers the amount of income that is taxable in the year the asset is purchased. Additionally, depreciation can be used to offset other income, which can further reduce your tax liability.
When it comes to real estate, there are a number of different depreciation deductions that can be taken, including the cost of the land, the structure, and any improvements that have been made.
3. Cost Segregation
By taking advantage of cost segregation, investors can deduct a portion of the cost of the property as depreciation expenses. This can significantly reduce the amount of taxes owed on the property.
Additionally, lenders can also benefit from other tax breaks, such as the mortgage interest deduction and the capital gains tax exclusion. All of these benefits can add up to a significant amount of savings on your taxes.
4. 1031 Exchanges
One of the best tax benefits of real estate investing is the ability to do exchanges. These can be used to delay paying taxes on the sale of an investment property.
This is because when you do an exchange, you are taking the proceeds from the sale of one property and using them to purchase another one. The exchange must be for a similar estate, and it must be done within a certain time frame.
This can be a great way to defer taxes on your investment income. You can also click here if you want to start an exchange today!
A Guide to the Best Tax Benefits of Real Estate Investing
The tax benefits of real estate investing can help save you money in many ways. These include the ability to deduct expenses, take depreciation deductions, and the power to take advantage of the 1031 exchange.
Talk to your accountant or tax advisor to learn more about how these benefits can bring off money on your taxes.
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