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Real estate investing
offers extraordinary
tax advantages not
available with othertypes
of investments. You
will have little,
if any, taxable income
from your investment
in real estate before
you sell it. In
addition, when you
sell your real estate
investments there
are many opportunities
to defer the gains.
Below are some highlights
of the tax advantages
available to real
estate investors.
- Basic
Deductions: Nearly
all expenses associated
with the purchase,
sale and management
of the property
are tax deductible.
Some of the common
deductions related
to real property
include: closing
costs, mortgage
interest, travel
expenses, repairs & maintenance,
property taxes,
homeowners association
fees, advertising,
insurance, supplies,
management fees,
and utilities.
- Depreciation:
Depreciation is
an extremely valuable
deduction available
for real estate
investments! The
value of the structure
on a property (not
the raw land) is “depreciated” evenly
over 27.5 years.
This deduction
costs the investor
NO CASH and it
offsets most, if
not all, of the
rental income generated
from the property.
Depreciation can
often exceed the
amount of income
generated and allows
the investor to
show a loss on
the investment,
even while it generates
positive cash flow.
For example, a
home is valued
at $200,000, and
$150,000 of the
value is related
to the structure.
The annual depreciation
is $5,455 ($150,000
/ 27.5). If the
home cash flows
$200 a month for
an annual positive
cash flow of $2,400,
the investor will
pocket the $2,400
cash and still
claim a loss on
the investment
of $3,055 ($5455
- $2,400).
- $25,000
Write-off for Rental
Real Estate: Generally
rental real estate
is considered a
passive activity
and losses from
passive activities
can only offset
income from other
passive activities.
Meaning, a part
time investor can
not use real estate
losses to offset
other income from
your regular job
or spouse’s
job. An exception
to this rule exists
for rental real
estate. When the
investor actively
participates in
basic management
decisions, up to
$25,000 of losses,
including depreciation
can be taken to
offset income from
salaries or other
investments. Active
participation is
satisfied without
substantial involvement
and while using
a property management
company.
- Loss
Carry Forward:
Since passive losses
can only be used
to offset passive
gains, you cannot
typically use 100%
of your losses
on real estate
in the current
year. However,
all of these losses
can be cumulatively
carried forward
to offset the gain
on the sale of
your real estate
investments. Using
the depreciation
example above,
the $3,055 loss
will be carried-forward
to offset the gain
on the sale of
your property.
- Real
Estate Professional
Status: If the
investor spends
most of his time
in the real property
businesses, he
is considered a
real estate professional.
This allows an
investor to deduct
all losses in the
current year to
offset any other
income. That includes
income from his
employment, or
earned by a spouse.
Using the depreciation
example above,
the $3,055 loss
will be used offset
other income earned
by the investor
in the current
year. The Real
Estate Professional
requirement is
satisfied if the
investor or spouse
spends 750 hours
or more in the
real property business.
- 1031
Exchange (Like-Kind
Exchange): A 1031
exchange offers
investors the opportunity
to defer taxes
on real estate
gains by reinvesting
the gains in similar
real estate investments.
When a property
is sold through
a 1031 exchange,
the investor can
claim ZERO gains
if the proceeds
are re-invested
within 6 months.
This is a powerful
tool for the serious
long-term real
estate investor,
as it can produce
significant tax
deferrals and savings.
* We are not Tax
Professionals and
this information
should not be considered
tax advice. Please
consult a Tax Processional
for clarification
on specific deductions
and how they apply
to you.
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