Tax Benefits for Real Estate Investors

Are you considering investing in real estate? If so, you likely already know that this is a great way to diversify your portfolio. However, you may not be fully aware of all the fantastic tax benefits real estate investors can reap. Read on to discover more!

If you’re looking to invest in a new property, Jimmy Carroll Realty can help you find the perfect option in the Isle of Palms, SC area. Contact us today to get started!

Ability to Deduct Expenses

There are a variety of tax deductions you can take advantage of if you plan to rent your property. These deductions, also known as “tax write-offs,” will encompass the necessary expenses required to run your rental, such as:

  • Mortgage interest
  • Property insurance
  • Property tax
  • Repairs and renovations
  • Management fees
  • Advertising

The advantages don’t stop there. For instance, investing alongside a limited liability company (LLC) or a limited partnership (LP) may open up even more opportunities for deductions, including:

  • Legal fees
  • Marketing expenses
  • Office space
  • Office equipment (computer, shredder, printer, etc.)
  • Travel expenses

Whether you decide to invest independently or with a partner, be sure to track your expenses throughout the year meticulously. If done correctly, you’re sure to find some serious savings.

Utilize Depreciation

After using your property for income-producing purposes for a year, you’re eligible for a depreciation deduction. Depreciation reimburses you for the decrease in your property value due to the common wear and tear it will face throughout its use. If you have a rental property, you can utilize the depreciation deduction for 27.5 years, which is a property’s average life span. For commercial real estate, you can take advantage of this deduction for 39 years.

Capital Gains Tax vs Income Tax

The profit that a homeowner receives after selling a property is known as capital gains. Capital gains can be taxed as either short-term or long-term capital gains. In either case, their tax rates are often significantly lower than those of income taxes. Here are the defining qualities of each type of capital gains:

  • Short-term capital gains. These are profits acquired from selling an investment property that was held for a year or less.
  • Long-term capital gains. These include profits acquired from selling an investment property that was held for more than a year. Long-term capital gains typically offer a lower tax rate than short-term capital gains.

Defer Capital Gains with a 1031 Exchange

Although tax rates on capital gains are significantly lower than those of traditional income taxes, it’s even possible to avoid paying capital gains taxes altogether. Investors can do this through a 1031 exchange. This is when you swap your current property for one that is relatively similar, hence limiting or completely avoiding your ability to be taxed. However, to qualify for a 1031 exchange, certain criteria must be met:

  • The property you are exchanging must have been used for business
  • The value of the new property must be greater than or equal to that of the original property
  • The properties in the exchange must be traded for a specific asset—for instance, a real estate investment trust (REIT)

Retirement Accounts are Tax-Deferred

An often overlooked tax benefit from investing in real estate includes access to tax-deferred retirement accounts. These can sometimes even be completely tax-free, depending on your specific situation. In essence, accounts such as health savings accounts (HSAs) and some individual retirement accounts (IRAs) offer you an avenue to invest in real estate without having to deal with the tax burden upfront. Note, however, that certain contribution limits and restrictions will apply.

Opportunity Zone Funds

Opportunity zones are defined as the top distressed and rural locations in the United States. To help promote growth in these areas, the Tax Cut and Job Act was rolled out in 2018 as an incentive for investors.

When you sell a piece of property, you have the option to put your capital gains into an opportunity zone fund. The benefit of this? It allows you to defer or pay no capital gains taxes on your initial investment. However, this will depend on the time period in which the investment is held within the fund.

Choose Jimmy Carroll Realty

As you can see, the tax benefits for real estate investors are quite significant. If you’re looking to invest in a new property, Jimmy Carroll Realty can help you find the perfect option in the Isle of Palms area. With over 20 years of experience, our expert team is ready to assist you on your real estate journey. Contact us today!