As the economy shows signs of improvement, with the stock market rebounding and unemployment falling steadily, it is only reasonable to believe, all thing being equal, that the housing market will also rebound, and will once again become a very viable investment vehicle. There are a number of distinct tax advantages to be derived from investing in real estate, and this article will look at some of these advantages. For both middle and high-income individuals alike, the tax advantages of investing in real estate can be substantial. Some of the advantages are as follows:
The IRS allows investors to depreciate (deduct from rental income) the cost of a residential rental building over a period of 27.5 years, and 39 years for nonresidential property.
Gains you make from real estate investments are not taxed until you sell the property. For example, if you purchase a home for $150,000 and it appreciates to $200,000, the $50,000 gain is protected from taxes until you sell the property. This allows your investment to grow tax-free year after year, further compounding its growth.
Capital Gains tax rate:
A capital gain is the profit realized from selling an asset. A long term capital gain is taxed at a lower rate than ordinary income, and is currently at a maximum rate of 20%.
Tax Deferred Exchange:
Even though capital gains tax rates are relatively low, you can avoid them altogether by doing a Section 1031 exchange, also called a like-kind or tax-deferred exchange.
Tax deduction advantages:
Finance and operating costs such as mortgage interest, property management fees, property taxes, repair and maintenance, insurance, HOA fees, utilities, travelling to the rental property — all these charges can be claimed as deductions from your real estate rental income.
Limited deductibility of real estate losses from your other income:
Although Rental activities are considered passive activities, and the general rule is that you cannot offset your real estate losses against your other (non-passive) income, tax law, however, allows an exception to the passive activities rule, subject to certain conditions, as far as rental property is concerned.
Good investing, my friends.