When it comes to passive real estate investing, there are plenty of potential benefits. Not only can you earn rental income from a rental unit or revenue from selling a completed house flip, but there are also potential tax deductions that can help improve your overall returns.
To avoid leaving money on the table, real estate investors should work with an accountant to maximize potential tax deductions each year. Keep reading to learn about five tax benefits of investing in real estate!
1. Tax Deductions
Tax deductions are items you can subtract from real estate investment income to reduce the amount you owe to the IRS (Internal Revenue Service) each year. While you're probably familiar with personal deductions applied to your income taxes, rental properties and fix-and-flip real estate investments often have expenses that investors can deduct.
Some of the potential deductions that real estate investors can take advantage of include mortgage interest, repairs, business office expenses, insurance, and travel to and from properties.
If you're not sure if an expense qualifies as a deduction, a real estate tax professional can guide you. Tracking and including every potential deduction can significantly improve your returns from an investment property, but it's crucial not to deduct anything that doesn't legally qualify.
Additionally, depreciation can also be a valuable deduction for real estate investors. Depreciation is a non-cash deduction that allows you to write off the cost of an investment property over its useful life.
For tax purposes, work with your accountant to apply depreciation based on what the IRS considers for residential rental properties. Each year that you own an investment property, you can deduct a certain percentage of the purchase price of a rental property as depreciation expense.
It's important to note that while depreciation is technically a deduction, it's considered a paper loss since it's not an actual cash expense being paid out each year.
3. Professional Services
When it comes to passive real estate investing, working with professional services can help you save time and money in the long run. As you build your real estate investing team with critical members, you'll also have multiple expenses to cover anyone who delivers services enhancing your real estate investment business.
While you're not required to have a real estate lawyer, accountant, or property manager on your team, working with these professionals can help you avoid costly mistakes. In addition, the fees you pay for those services can become a tax deduction!
If you're hesitant to partner with the experts you need to support your portfolio and revenue growth because of the costs for their help, keep in mind that you'll get some of that money back by tracking the expenses and filing them as tax deductions.
4. Lower Rates for Long-Term Capital Gains
In general, capital gains are the profit earned from selling assets such as stocks, bonds, or real estate. However, if you sell a rental property after owning it for more than one year, the profit is considered a long-term capital gain and is subject to different tax rates than short-term capital gains.
The tax rates for long-term capital gains are lower than the tax rates for most other types of income, so passive real estate investors can often minimize their overall tax liability by holding on to properties for more than one year before selling.
While this is beneficial for residential rental property owners, fix-and-flip investors don't often benefit from lower long-term capital gains since they usually buy and sell properties without owning them for at least a year.
5. Rental Income Is Not Earned Income
One of the benefits of owning a rental property is that the rental income you receive is not considered earned income. This means that passive real estate investors can often take advantage of lower tax rates on rental income than they would on revenue from a traditional job.
Again, it's important to work with an accountant to make sure your rental income is being properly reported and taxed. However, in general, passive real estate investors can often enjoy a lower overall tax liability than those with earned income from a job.
Privy Helps You Find More Properties for Successful Real Estate Investing
When it comes to taxes, there are many potential deductions and benefits that passive real estate investors can take advantage of. From expenses like mortgage interest and professional services to depreciation and lower rates for long-term capital gains, there are a variety of ways to save on taxes when investing in real estate.
While we can't help you with your taxes or deductions, we can help you find the best investment properties in your preferred markets! Privy's algorithm scours the MLS in multiple markets throughout the country, then delivers the best matches to your criteria directly to your inbox. Let us help you build your real estate portfolio so you can experience more revenue from passive real estate investing! Reach out soon to learn more about the Privy Advantage.
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