Investing in real estate can be a profitable activity if you know how to seize advantage of the numerous tax benefits available. It is fundamental to consult an expert CPA to identify the appropriate tax strategies for your case and guide you throughout the process to ensure full tax compliance.
In this article, you will find an overview of the key tax benefits for real estate investors.
Tax Benefits of Real Estate Investing – Taking a Closer Look
Operating Expenses
The Internal Revenue Service (IRS) allows rental property owners to deduct several expenses on their tax returns, as long as they can prove they are inherently related to the real estate investment.
Possible deductions include property taxes paid to state and local governments (up to a total of $10,000), insurance premiums, mortgage interest, and expenses associated with maintenance and repairs.
If the real estate investment requires employees or contractors for management, it is possible to deduct workers’ insurance premiums, health insurance premiums, and management/contractor fees.
Under IRS regulations, the deductible items must be “ordinary and necessary” to the adequate management and running of the real estate investment.
Other examples of deductible costs include investment-related expenses with traveling and lodging, non-mortgage interest fees on loans taken out to pay for repairs on a property, and fees paid for professional assistance (e.g., lawyers, accountants, real estate agents, etc.).
Depreciation
If you have invested in rental property to produce income, you can file for a deduction on the depreciation of the premises. The tear and obsolescence eventually take their toll on real estate, which directly affects the market value of the property.
IRS regulations provide that the life expectancy for real estate is 27.5 years for residential properties and 35 years for commercial properties. In both cases, you can save money on taxes with a depreciation deduction.
Capital Gains Tax
Capital gains tax applies to the sales of assets like stocks, bonds, and real estate. If the property was held for less than one year, the tax applied is the same applied to personal income. Conversely, properties sold after at least one year of ownership have higher capital gains.
Selling the property sooner than one year is not a good decision, as it results in the impossibility to pay the long-term capital gains rate or even avoid the tax altogether in some cases. Depending on the owner’s level of income, he or she may not pay capital gains tax at all.
Self-Employment & FICA Tax
The Federal Insurance Contributions Act (FICA) tax is a self-employment tax consisting of the cost of Social Security and Medicare required for all individuals working for themselves.
The income from a rental property is not treated as “earned income” for tax purposes. Hence, if a rental property owner is a self-employed landlord, it is possible to avoid payroll tax.
Qualified Business Income Deduction
When you run rental properties as a business, IRS considers this operation as a “small business” for tax purposes. If you own a limited liability company (LLC), an S-Corporation, or a sole proprietorship, it is possible to claim the QBI deduction.
Also referred to as “pass-through deduction,” the qualified business income (QBI) deduction offers a tax break to entrepreneurs, allowing certain entities to deduct up to 20% of their business’s income.
This benefit is available to real estate investment trust (REIT) investors, as this type of trust also has “pass-through” status for tax purposes. Those seeking to claim this deduction must consult with a CPA before 2025, as the benefit is not scheduled to end until that year.
Do You Want to Enjoy the Tax Benefits of Real Estate Investing? – Immediately Contact an Expert CPA
Waste no time with uncertainty. Call Edward D. Quilca, CPA at (786) 310-5582 or email [email protected] to find the best tax-saving strategy for your real estate investments.
