A snapshot of the tax benefits of owning real estate, from your primary residence to investment properties

But one of the most tried-and-true methods of building wealth is still buying real estate.

Of course, that usually starts with purchasing your first home, which you possibly fix up and sell a few years later for a profit. From there, you might do the same thing with a bigger personal residence, and eventually move on to purchasing rental properties, or even commercial investments.

Just like the game of Monopoly, owning real estate is one of the best ways the average person can significantly improve their net worth.

But if you truly want to win this game, you’ll have to navigate the tax implications of real estate along the way.

In fact, as you buy, sell, manage, and profit from your real estate investments, there are serious taxation events along the way, which could enhance (or erode) your financial windfall.

So, what are the highly-vaunted tax benefits when you own real estate?

The following is a quick snapshot of the most common tax breaks for property owners, but we also encourage you to contact our office for a more thorough discussion.

• Deductions

There are several opportunities to write-off tax liability from homeownership, like the deduction of mortgage interest and property taxes on your primary residence, or operating expenses, repairs, upgrades, and improvements on rental properties.

• Pass-Through Deductions and Passive Income

Thanks to the Tax Cuts and Job Act of 2018, if you own a rental property or investment you may be able to deduct up to 20% of you net business income, reducing your effective income tax rate.

• Capital Gains

When you sell your residential, rental, or commercial property, there are tax advantages when dealing with those profits, particularly with long-term capital gains, and especially if it was your primary residence.

• Depreciation

Rental property owners can benefit from depreciation, which is an allowance for exhaustion or wear and tear, according to the IRS.

• 1031 Exchange

The Internal Revenue Code’s Section 1031 outlines the exchange of one form of real estate asset for another with limited – or no – taxation.

• Tax-Deferred Retirement Accounts

Certain IRAs (individual retirement accounts) and HSAs (health savings accounts) allow investors the change to buy tax-deferred real estate.

• Self-Employment/FICA Tax

The Federal Insurance Contributions Act (FICA) requires self-employed business owners to pay a 15.3% tax that’s split between employees and employers, but you would be able to eliminate that by investing in passive real estate activity.

• Opportunity Zones

The aforementioned Tax Cuts and Job Act of 2018 names 8,700 opportunity zones across the US, many of which are in downtrodden areas. If you invest or build within those zones, you can pay little or no capital gains tax on any properties you sell there.

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Remember that not every situation is the same and tax codes are updated every year, so please make an appointment with our office using the link below to review your tax situation.

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