Savvy individuals prize property investing for its many potential tax benefits. It is one of the significant advantages of investing in this space, which makes a substantial difference in net returns and profits.
Disclaimer: This informational article is for educational purposes only. It should not be taken as personalized, professional tax advice. The exact tax benefits and amount of savings available to each investor will vary depending on their situation and how they structure their investments.
It is always wise to consult your tax and legal experts before making any financial moves.
Home Related Tax Exemptions & Savings
When it comes to owning your residence, there can be a variety of tax benefits.
Depending on the state in which you own your own home, this may include homestead exemptions that cap property tax increases and provide annual deductions. There may also be exemptions based on age, prior military service, or property use (such as agricultural exemptions).
Homeowners can also be exempt from up to $500K in capital gains taxes if they have held their home for several years.
However, it is important to note that your own home isn’t a true investment. It does not count towards your net worth.
Lower Tax Rates On Investment Income
One of the most important changes in the dynamics of your finances and tax situation is to move from earned income to investment income.
The best passive income investments will provide long-term income and wealth growth, with lower taxes than if you had a job and salary.
Just be sure that you are holding them long enough to qualify for the most savings and lowest capital gains tax rates.
Deferred & Tax-Free Investment Returns
Further tax benefits can be found from investing in property through your self-directed IRAs and 401ks.
Traditional accounts offer the potential for immediate tax deductions in a given tax year, as well as taxes being deferred until you make withdrawals. A point at which you hope to be in a much lower tax bracket.
In contrast, Roth IRAs offer tax-free investment returns for your lifetime.
These accounts can also be inherited by your beneficiaries.
Trusts & Death Taxes
Another great benefit of well-structured property investing is being able to eliminate the costs and time of transferring your estate and property assets to your heirs on death.
With vehicles like trusts, this transfer can be immediate and automatic and may avoid substantial death and inheritance taxes.
You may also wish to gift investments, assets, and real estate to your heirs over time, during your lifetime to reduce tax exposure.
Additional Tax Write Offs & Deductions
Forming your own real estate investment business, including a simple sole proprietorship can yield many other potential tax write-offs and deductions.
This may include home office deductions. As well as being able to write off many expenses, including travel, vehicles, equipment, gas, dining and entertainment, internet and phone service, salaries, and vendor expenses, like marketing.
Tax Loss Harvesting
There can also be tax benefits of moving your money out of other mature or declining investments, and into real estate. Such as switching from stocks to mortgage notes or rental properties. This is called tax-loss harvesting and could give you an additional $3,000 tax break.
There are many tax benefits from investing in property. Even one or two of these can add double digits to your net income and investment returns. Savings that can be reinvested and compounded every year.
For more tax tips check out this article for investors.