How to Minimize Taxes Through Real Estate Investments

July 19, 2023
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Real estate is widely considered to be one of the safest long-term investments around. There will always be need for residential housing, commercial property and raw land. Many entrepreneurs make real estate investing their full-time business and it can be quite lucrative. Many other people own some real estate “on the side,” often used for rental income.

There are many reasons why a savvy investor should consider some real estate holdings as part of a diversified portfolio. Of course, value appreciation over the course of time is one. Most property will appreciate in value if you hold onto it long enough, though the real estate market will have its own ups and downs that you have to understand. Second, there are numerous tax advantages to real estate ownership.

Real estate investors can enjoy tax benefits such as significant property tax deductions, writing off certain ownership and property management expenses, deferred tax strategies, and more. Let’s take a look at just a few of the best tax advantages of real estate investments: 

Passive Income

Depending on how you manage your real estate business and any rental property management, you will be claiming either “passive” or “active” income from your investment. It is important to understand the differences, as this may affect which expenses you can and cannot deduct on your income taxes. Either way, there are benefits to earning income through real estate holdings. To learn more about passive income benefits of single-family and multi-family real estate investments, click here to read last week’s article.

Bonus Depreciation

If you have a qualified property, you can deduct up to 100% of the purchase price through first-year bonus depreciation. This strategy can be a little tricky. It is very important to understand the tax codes as outlined in the Tax Cuts and Jobs Act (TCJA) of 2017, and you may need to perform a thorough cost segregation study to determine expenses that are depreciation-eligible for a specific property. Talk with an experienced tax advisor to implement this tax-advantaged strategy. 

1031 Exchanges

If you are selling a property and buying a new one, utilize an IRC Section 1031 exchange if applicable. This will allow you to defer all your capital gains taxes by reinvesting in a “like kind” property. Just about any new property will qualify as long as it is being used exclusively for business or investment purposes. It must also be of the same or greater value than the sold property. There are some timelines you must meet and other qualification standards to understand. Again, it helps to work with a seasoned advisor to properly execute a 1031 exchange for tax purposes.

Pass-Through Tax Deduction

You may also qualify for a pass-through income tax deduction of up to 20% as a real estate investor. You will need to have the right business entity established (LLC, S-Corp, Sole Proprietorship or Partnership) and meet specific income limits.

Investing in real estate can bring many tax advantages and there are great strategies you can use to maximize your tax savings. The ideas listed above are just a few examples. To learn more about the tax benefits of real estate investing and for help in managing your investment plan and tax plan, contact Illumination Wealth today.