Real estate investing can offer several tax advantages to investors.
Depreciation
One of the most significant tax benefits to real estate investing is depreciation. The Internal Revenue (IRS) allows real estate investors to deduct a portion of the property’s value as depreciation expenses over its useful life. The IRS considers residential rental properties to have a useful life of 27.5 years, while commercial properties typically depreciate over 39 years. The deduction can help reduce taxable income and lower overall tax liability. Investors looking to invest in residential or commercial real estate should consult with a real estate attorney for investment properties and a certified public accountant.
Mortgage Interest Deduction
Inventors who finance their real estate purchases through mortgages can deduct the interest paid on the mortgage from their taxable income. This deduction can be a substantial tax benefit, particularly in the early years of a mortgage when the interest portion of the payment is higher. Real estate attorneys for investment properties can assist in the process of obtaining real estate financing and can review and negotiate the loan terms with the lender.
Property Tax Deduction
Investors can deduct the amount they pay in property taxes from their taxable income. This deduction can be particularly valuable in areas with high property tax rates.
1031 Exchange
Section 1031 of the IRS Code allows real estate investors to defer capital gains taxes when they sell a property and reinvest the proceeds into a like-kind property. By using a 1031 exchange, investors can defer paying taxes on the capital gains and potentially build wealth by continually exchanging properties. 1031 exchange transactions are completed with the involvement of a real estate attorney for property transactions or real estate attorney for investment properties and an exchange accommodator.
Passive Loss Deduction
Real estate investments often generate passive income, and losses from passive activities can be used to offset other passive income. This means if your rental properties generate a low, you may be able to deduct that loss against other passive income, such as income from other rental properties.
Opportunity Zones
Opportunity Zones are designated economically distressed areas where investors can receive certain tax benefits by investing in real estate within those zones. These benefits include temporary deferral and reduction of capital gains taxes. It is important to consult with a real estate attorney for investment properties or a real estate attorney for property transactions when considering purchasing and developing real property located in an opportunity zone.
Before purchasing an investment or commercial property, reach out to a commercial real estate attorney at Lotus Law to consult on the deal terms and structure to maximize the benefits from real estate investing.