You may have heard that real estate offers tax benefits, but you might not know the specifics. This can make it hard to determine whether investing in real estate suits your finances. The good news is that investing in real estate can help reduce taxes.
Some offer significant savings over time, so they’re worth exploring if you are considering buying or selling a home or rental property.
The tax benefits of investing in real estate are substantial.
The tax benefits of investing in real estate are substantial. You may be eligible for a depreciation write-off, which allows you to deduct the cost of specific improvements and repairs from your annual taxable income.
If you rent out your property, any rental income is also tax deductible—and if the property is used as your primary residence, there are additional tax benefits associated with homeownership. One of the significant tax benefits is 1031 exchanges. Here, you have 1031 exchanges explained.
Two common ways to invest in real estate are owning a home and buying rental properties.
Owning a home is the most common way to invest in real estate because it allows you to build equity and increase your net worth over time.
However, renting out your property may be better suited for you if you’re looking for more income than just an increase in value.
Rental properties can be great investments because they provide consistent monthly income, which means that even if the economy takes a dip or interest rates rise, someone will still pay rent on time every month!
In addition to providing steady income from tenants who live on-site at these properties (and thus help maintain them), many landlords have found success by charging higher rents than other available options within their area so long as those tenants stay put for several years at least (and preferably longer).
When you own your home, which appreciates, so do the tax advantages.
When you own your home, which appreciates, so do the tax advantages.
The Home Mortgage Interest Deduction
If you itemize deductions on your federal income taxes and use this deduction for 2016, this is an excellent tool for saving money on taxes.
It allows homeowners who itemize deductions to deduct their mortgage interest payments from their taxable income if they own or purchase a new home by Dec 31st, 2017.
This means that even if someone doesn’t have any other deductions besides their mortgage payment deduction—which would mean they wouldn’t be able to deduct anything else anyway—they could still save money with this one!
The Home Sale Exclusion
When selling their primary residence after having lived there for two out of five years prior (and meeting other requirements), taxpayers may exclude up to $250k from capital gains taxes when selling their property at fair market value. However, this only applies if both spouses file jointly (so couples cannot each claim half).
The Home Equity Loan Exclusion
Similar rules apply here regarding how much can be excluded from capital gains taxes when taking out loans against real estate investments such as rental properties. However, unlike above, only one spouse must meet specific criteria before applying this exclusionary rule.
Rental properties offer several advantages for you and the owner of the property.
The first advantage of owning rental properties is deducting the cost of repairs, maintenance, and upgrades. Those costs are deductible if you are a landlord and make improvements to your rental property.
The second advantage of owning rental properties is that they provide tax benefits for tenants who live in those units. For example, if someone rents out their house while traveling abroad for a year—or even just away at school—they won’t have to pay income tax on any rent paid by their tenants during this period.
Thirdly, when calculating capital gains taxes on property sales after holding them for more than one year (the standard definition), owners may also be able to exclude some or all profit depending upon whether it’s considered “personal use” (for example).
The depreciation write-off can help reduce your taxes.
Depreciation is a tax write-off that can help reduce your taxes. It’s a vital tax benefit of investing in real estate, but it’s also something you should know about even if you don’t invest in real estate.
It works this way: When you buy an asset (like a rental property), the IRS lets you reduce some of the cost from your income each year.
This reduces how much money they think they need to tax from you, so it helps keep your taxable income lower than it would be otherwise and thus saves money on taxes for everyone who does this type of thing every year.
