Along with being one of the most tangible, steady, and secure investment options out there, real estate investing can also bring a long list of tax benefits to those reaping the yearly passive income. For many types of investments, certain tax benefits come along with them that can add incentives and save those who utilize certain investments money come tax season. Real estate investing comes with many tax benefits.
If you are debating whether or not to choose real estate for your next investment, this is your chance to better understand the tax advantages that come with it. Not only can you grow your wealth with each coming year, but you can easily take advantage of certain tax benefits.
Depreciation Over Time
Depreciation accounts for the wear, tear, and degradation that occurs on the property over time. This can then help you deduct depreciation as an expense on your yearly taxes, allowing you to lower your taxable income.
Depreciation can be determined by the year the property was purchased and by calculating the timeline of useful years left in the home or unit. Once this schedule is created, you can use this to lower your yearly taxable income on the property and continue to pay less on your taxes each year.
Capital Gains
Capital gains taxes are assessed when you choose to sell an asset. In this case, it is applied to the appreciation of your investments, how much you earn, how long you have owned them, and your tax filing status. If your asset has grown in value since you purchased it, you may be asked to pay taxes on the profit of the investment. Depending on how long you have owned the asset can change whether you are dealing with short-term or long-term gains.
1. Short-Term Gains
Short-term gains refer to when you decide, or are forced, to sell your assets after 12 months or less of owning them. In these circumstances, this might have a negative impact on your taxes as they are taxed like general income. This may cause you to pay more than what you have earned over that year from the investment.
2. Long-Term Gains
If you sell your assets after 12 months, you will be categorized within long-term gains. In this scenario, it is much more likely that you have profited from your investment after this time. You will be taxed at a lower tax rate than short-term gains, and it can be beneficial to hold onto your investment as long as possible to reap the benefits.
Incentive Programs
Depending on what you qualify for as a real estate investor, you may be able to take advantage of one of the government incentives that can not only save you money but are created to help homes be built and remodeled for those who need them.
1. Opportunity Zones
Founded by The US Department of Treasury, the 2017 Tax Cuts and Jobs act encourages real estate investors to put their money into specific communities to help promote developing areas and economic growth. If this program is utilized, investors can earn an increase in capital gains up to 10% if held for five years, deferred payments on capital gains until 2026, and refrain entirely from paying capital gains if they are invested for more than ten years.
2. 1031 Exchange
The 1031 exchange allows investors to reinvest their profits into new real estate without the hassle of capital gains. It is only possible if the next investment is worth the same or has a greater value than the last one. This exchange can go on indefinitely as long as the new property is of the same or higher value.
Investing in real estate can offer many profitable and stable opportunities to those who choose it. On top of a passive income into retirement, there are many tax benefits available. If you have any questions about investing in real estate or taking the first steps, reach out to the team at Morton Capital.