Interested in diversifying your investment portfolio beyond retirement accounts? Whether you’re a beginner or a seasoned investor, navigating the myriad of investment options available can be overwhelming.
From stocks to cryptocurrency, the choices are vast. But let’s focus on one alternative: real estate. Discover how real estate investments can enhance your financial well-being, with a special focus on tax benefits. If you’ve been pondering the tax benefits of investing in real estate, this guide has you covered.
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What Are the Tax Benefits of Investing in Real Estate?
Now that you know a bit more about the general reasons for investing in real estate, you may still wonder, “What are the tax benefits of investing in real estate?” Luckily, I’ve included a breakdown of some of the most noteworthy tax advantages so you can understand better how and where to invest your hard-earned money.
On top of the steady rental cash flow, a hedge against market volatility, and a diversified portfolio, real estate investing comes with certain tax benefits that can help you optimize potential savings on your yearly return.
Tax Benefits of Real Estate Investing: A Comparison | |||||
Mortgage Interest Deduction
Designed for homeowners and investment property owners, this tax incentive allows you to subtract the amount of interest paid toward a mortgage from your taxable income. Your mortgage company decides The deductible amount is decided each year by your mortgage company and is listed on Internal Revenue Code Form 1098. Mortgage interest deductions can be a boon to investors whose qualified itemized deductions — including mortgage interest — are greater than the standard deduction.
Property Tax Deduction
This tax advantage allows real estate investors to deduct state and local taxes they pay on investment properties from their federal income taxes.
For example, if you purchased a $750,000 property in San Francisco with a county tax rate of .740% of the assessed home value, you’re looking at $5,550 in local taxes. On top of that, the state of California will want .710% of the assessed value in taxes, which comes to an additional $5,325.
This means you could potentially owe a total of $10,875 in property taxes to state and local governments. Thankfully, the property tax deduction allows you to write that amount off when you file federal income taxes the following year.
It’s worth keeping in mind that this tax deduction is subject to certain state and local limitations and restrictions. Make sure to clarify any lingering questions with your tax professional.
Passive Loss Reduction
Real estate investments can generate passive income or passive losses. If you actively participate in real estate investing, you may be able to deduct up to $25,000 in passive losses1 against your passive income.
However, this is limited to investment properties in which you are currently active. So, if you sell a property because it’s bringing in losses, you can no longer use this deduction.
Depreciation
Depreciation is a method of assessing the cost of a physical asset like real estate over the course of its useful life2. Instead of taking a single deduction for the year you purchased or made significant improvements to a property, depreciation allows you to distribute the deduction across the property’s useful life (estimated years of service for profitable revenue generation).
Depreciation begins the moment you place a property into service. In this case, as soon as it’s ready to be used for rental services. Essentially, as long as you are using a rental property to generate income, you can deduct the costs of buying and improving that property from your taxes and potentially lower your taxable income.
1031 Exchange Tax Deferral
Whenever you sell an investment property, the IRS wants you to pay capital gains taxes on the amount of profit from the sale. Typically, capital gains taxes are a taxed percentage that’s deducted from the profit on sales of capital, like real estate.
For example, if you purchased a property for $500,000 in 2015 and sold it for $750,000 in 2023, you’ve made a $250,00 profit. If you’re in a tax bracket that requires you to pay 20% in capital gains taxes, you’ll have to pay $50,000 of those proceeds in taxes.
However, if you opt for a 1031 exchange, you can defer those taxes by purchasing a “like-kind” property of equal or greater value and reinvesting the sale proceeds into the new property. This keeps money in your pocket and can potentially increase your purchasing power when upgrading your real estate portfolio.
With this overview of tax benefits from investing in real estate, you should have a clearer idea of whether or not investing in real estate is the right move for you. However, I cannot stress strongly enough that, before making a decision, you should discuss how real estate investments fit into your portfolio with your financial advisor and clarify all requirements, implications, and tax benefits with your CPA or tax advisor.
How CVC Can Help You Enjoy the Tax Benefits of Investing in Real Estate
One of the barriers to entry for many potential investors when testing the waters of real estate is that despite the passive wealth accumulation, investment properties come with additional responsibilities, such as physical and administrative tasks. You’ll have to manage your properties effectively, keep up with laws and regulations, or hire a third party to handle these things for you. However, there are ways to enjoy the benefits of real estate investing without requiring you to be actively engaged.
We may have the perfect solution.
Enjoy the Benefits of Real Estate Investing Without the Headaches: Partner with Canyon View Capital
Here at Canyon View Capital, we understand the ins and outs of real estate investing. That’s because, for over 40 years, our professionals manage a real estate portfolio that has grown to over $1B3 in aggregated value. Although getting started in a new investment realm can be intimidating, the CVC team uses our shared expertise to guide investors through the world of real estate investing.
Our multifamily real estate investment options offer our clients truly passive income that brings them the benefits of real estate investing without the daily responsibilities. Moreover, for those looking into 1031 exchanges, we help ensure your seamless navigation through all the hurdles.
Most importantly, the professionals at CVC are committed to ensuring that investors like you understand their options thoroughly so you don’t have to wonder about things like “What are the tax benefits of real estate?” anymore. A bright financial future lies ahead, and we want to help you find the path!
Still asking yourself “What are the tax benefits of real estate?”
For over 40 years, the principals at Canyon View Capital have worked in real estate, with a portfolio currently valued at over $1B2. Our buy-and-hold strategy, concentrated in America’s heartland, is designed to provide consistent investment returns.
Still asking yourself, “What are the tax benefits of investing in real estate?”, call CVC today! Get Started
Citations
1Kagan, Julia. “Passive Activity Loss Rules: Definition and When You Can Use Them,” Investopedia.com 3/05/23. Accessed May 22, 2023.
2Folger, Jean. “How Rental Property Depreciation Works,” Investopedia.com 3/11/22. Accessed May 19, 2023.
3$1B figure based on the aggregate value of all CVC-managed real estate investments as valued on March 31, 2023.
Eric Fisher, Chief of Staff
Eric joined Canyon View Capital in August 2021 with 15 years of hotel management experience grounded evenly between Property & Corporate Operations, and Business Development & Acquisitions. After $500M+ in hotel acquisitions, Eric uses his nuanced understanding of the acquisitions and transitions processes to support CVC real estate investments. His professional versatility makes Eric an invaluable resource for the President and Executive Team in all business functions, including Investments, Operations, and Strategy.
