Before I get into the key tax benefits of real estate investing, I need to make one thing clear: At Oak Street Assets, we are not attorneys, CPAs or tax professionals.* That said, we ARE seasoned real estate investors that can speak honestly and openly from years of experience in the real estate field.
I’ll also be the first to tell you that many tax preparers don’t know or fully understand the many benefits of investing in real estate and require some oversight. That’s often the difference between a tax preparer and a tax planner. From experience, I can tell you that it usually pays to work closely with a tax professional who specializes in real estate.
Now, let’s delve into the world of taxes and real estate. First, we’ll take a closer look at the idea of taxing the rich and what that has to do with investing in real estate. Then, I’ll share some of the top tax benefits of real estate investments.
“Tax the Rich”: How is This Connected to Real Estate Investing?
This is a HOT TOPIC and as it is a politically charged issue, people fall on all sides. As high-income earners, my physician spouse and I pay amongst the highest in taxes. Everyone has to contribute to support the country, “that is the only way it’s going to work”.
If you are a fan of the West Wing TV show, I recall and quote this clip: Tax the Rich
The truth is that the government provides incentives to promote people to push forward and establish needed programs that the government cannot accomplish by itself. This is, in fact, why energy and real estate tax benefits exist in the first place.
If we need more housing, we give tax benefits to get people to create it. Attacking the players that are moving the economy and country forward can be shortsighted.
I like this video example of how tax changes are viewed: The Tax System, Explained in Beer
Understanding the Tax Benefits of Real Estate: How Investing in Real Estate Can Potentially Lower Your Tax Bill
Multifamily real estate investing not only provides strong risk-adjusted returns and can generate passive income, but it also comes with substantial tax advantages. Here, we’ll look at some of the key tax benefits of real estate investments.
1. Tax Deductions
Investing in real estate offers deductions for:
• Interest on mortgage payments
• Property taxes
• Repairs and maintenance costs
• Insurance premiums
Deductions such as these on your tax return effectively reduce your taxable income and ultimately, serve to lower your tax burden.
2. The 1031 Exchange
Another tax saving alternative is a 1031 exchange. This is where you can defer capital gains taxes on the sale of one property by reinvesting your profits into a new property. The term “1031” simply refers to Section 1031 of the Internal Revenue Code (IRC), which governs this exchange process. Utilizing a 1031 exchange allows you to buy a new property with more value while reducing your tax burden.
3. Depreciation
As a PASSIVE investor, the main tax benefit of investing in a real estate syndication is DEPRECIATION. With depreciation, you can offset rental income and reduce your taxable income.
Essentially, the government recognizes that buildings age and lose value over time (the land does not). In general, buildings can be depreciated over either a 27.5 year (residential properties) or a 39 year (commercial properties) period.
Many people are familiar with standard or ‘straight line’ depreciation of a property where the value of the property is reduced evenly over the years. ‘Accelerated depreciation’ is when certain categories of assets within a building can be depreciated more quickly, over 5, 7, or 15 years (carpet, lighting, cabinets, etc.).
A specially trained engineer does a ‘cost-segregation study’ to break down all of these categories on the property into different time frames for realizing the losses for tax purposes. Moreover, we currently have the option of applying ‘bonus depreciation’. This allows us to take much of these losses in the first year and can be a very powerful incentive for people to invest their money and get the real estate machine moving.
Putting the Tax Benefits of Real Estate to Work for YOU
The benefits mentioned above can offset capital gains and can be incredibly helpful for reducing one’s tax burden (passive gains, not active income). This can be the sale of the same property, a different property OR a gain from a different passive activity (such as income from renting farm land or selling business shares). Savvy investors often look for such investments to offset an anticipated gain from a different investment in that tax year.
Pro Investing Tip: There are some strategies that exist for offsetting active income with investments. Please reach out if you are interested in learning more about those and we can discuss them in detail. These typically include achieving R.E.P.S. (Real Estate Professional Status) or managing your own Short Term Rental when using real estate investments.
The bottom line is that PASSIVE losses like the ones mentioned above can be used to offset PASSIVE gains that investors may have this year and/or in future years (such losses carry forward until used). When you join our Investor Club, you get access to exclusive investment opportunities that can help increase the value of your real estate portfolio while potentially reducing your tax burden.
Join the Oak Street Assets Investor Club today and put the tax benefits of real estate to work for YOU!
*Investors are responsible for consulting with their own tax advisor as to the tax consequences associated with their investment. The tax rules are complex, change frequently, and depend on the individual taxpayer’s situation. No warranty or representation, express or implied, is made by Oak Street Assets.
