Real estate property owners experience a multitude of benefits as a result of property ownership, and the most discussed are typically residual income and investment portfolio diversification. In reality, one of the best benefits of investment property ownership is the tax benefits of investment properties. What are some of the ways that owning investment properties can net you tax savings?
When you invest in real estate, there are many expenses related to your investment that you can deduct at the end of the year. Some of the deductions that investment property owners can take include:
- Property taxes
- Property insurance
- Property management fees
- Mortgage interest
- Property repairs
- Capital improvements
- Maintenance costs
- Advertising and marketing expenses
If you operate your investment properties using an entity, like an LLC or LP, you can experience even more tax benefits of investment properties. Some of these other deductions include:
- Legal and professional fees
- Business office equipment
- Office space
- Internet, phone lines or PO boxes used for business
- Travel expenses
- Membership fees
Ensure that you keep good records for your end-of-year tax preparations.
If you own any properties that are used to produce income or run a business, you can factor in the depreciated cost of the property over time on your taxes. This deduction is designed to account for the decrease of value of a commercial or residential property over time due to wear and tear. One example of these tax benefits of investment properties would be a single-family rental you purchased for $200,000. Every year, you could deduct $7,272 ($200,000 divided by 27.5 years) from your taxes.
Thanks to the Tax Cuts and Jobs Act, any business that earns qualified business income (QBI) is able to use pass-through deductions to deduct up to 20% of their total income. These tax benefits of investment properties can only be used if your business was profitable, and it might be phased out at the end of 2025.
Capital Gains Taxes
Another one of the tax benefits of investment properties is the ability to use tax-deferred or tax-free methods of investing to avoid paying capital gains taxes. 1031 exchanges, for example, allow investors to switch out an investment property for a like-kind property to avoid depreciation recapture and capital gains taxes.
Experience the Tax Benefits of Investment Properties with MKS&H
MKS&H provides tax and accounting services to businesses of every size and in every industry. We can work with you to explore the many tax benefits of investment properties and assess your real estate portfolio. Contact us today for a consultation.