Real Estate Investing and Taxes

If you are looking for a way to possibly reduce the amount of taxes that you have to pay, you may be interested in learning about the tax benefits of investing in real estate. There are many tax benefits to investing in real estate. However, it is important to note that not every investor will qualify for every benefit, and if you have questions about real estate investing and taxes, such as how to use real estate as a tax shelter, you should always talk to a real estate attorney and/or tax professional. Here are a few of the different benefits that you may experience if you invest in real estate. 

You Can Use Real Estate As a Tax Write-Off

One of the tax benefits of investing in real estate is that you may be able to use real estate as a write-off in various ways. One of the most common ways that real estate can be used as a write-off is for mortgage interest. In many cases, you can write-off the mortgage interest that you pay for a home loan on your taxes. This can be a great way to get a tax benefit, especially if you have a high interest home mortgage. 

You Can Depreciate the House Over Time

Another benefit associated with investing in real estate is that you may be able to depreciate the cost of real estate, especially buildings and housing, over time. If you own a building and use it for business purposes, including rental properties, you may be able to write off a certain percentage of the value of the home or building as depreciation. There are specific rules pertaining to real estate depreciation, so it is best to talk to a tax professional to learn how to take advantage of this tax benefit. 

You Can Use Real Estate As a Tax Shelter

Investing in real estate can also be a way to create a tax shelter of sorts. If you are wondering how to use real estate as a tax shelter, you would need to learn more about section 1031 like-kind exchange. This is a tax shelter that allows you to exchange one real estate holding for another, without paying taxes on the exchange. This is because capital gains are not looked at if you use this type of tax shelter. As such, people exchange one home for another and trade-up a little each time, helping to increase their net worth without paying taxes. 

You Can Defer Taxes With Incentive Programs

There are many incentive programs out there that allow you to buy, upgrade and sell real estate, and in the process defer paying capital gains or avoid paying capital gains entirely. It is important to note that many incentive programs target poverty-stricken areas or disadvantaged tracts of land. The city, county, state or even federal government offers these tax incentive programs to help attract investors who want to help clean the area up and make it a nicer area to live in again. As such, this is a win-win for the government offering the tax incentive program and the investor taking part in the program.  The U.S. Department of Treasury also often offers opportunity zones for tax investors, so it is worth looking into these zones and programs if you are interested in tax benefits as a real estate investor. 

You Can Use a Pass-Through Deduction

The final benefit associated with investing in real estate is that you may be able to use a pass-through deduction. In order to use pass-through deductions, you must have your business set up as an LLC and you must pay yourself a salary from your LLC company. Pass-through deductions are complex and should only be completed with the help of a tax professional. However, essentially, you are able to write-off a certain amount of taxes using your LLC, and then write-off another percentage of your taxes from your own personal salary. This allows you to pass the deductions on, or use what is known as a pass-through deduction. 

Investing in real estate has many tax benefits. If you are looking to experience some of these benefits, or you have questions such as how to use real estate as a tax shelter, another investor may be able to help you. Chandler David Smith, a real estate investor, offers guidance and advice to other real estate investors. Visit his website today to see some of the information that he has to offer.