Whereas most investment vehicles only provide profit in one way, Real Estate investors enjoy the unique benefit of having four ways to profit from their investments. They include Tax Benefits, Appreciation, Principal Pay down and Cash-flow. This post reviews the tax benefits of Real Estate in comparison to other investment vehicles.
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Why Real Estate? Tax Benefits
There are a wide variety of tax deductions available to investors and owners of real estate. The top deductions include Depreciation, Repair/Maintenance costs, Utility costs, Professional Service costs, Mortgage interest, property tax and associated travel costs. By applying all of these deductions you can offset any actual profit you have made, reducing your taxable income.
What is Depreciation? It is an allowance for wear and tear on property and structural improvements. Land cannot be depreciated. You buy the property once but are allowed to deduct a portion of the value annually over its predetermined lifespan (5, 27.5, or 39 years) based on the Modified Accelerated Cost Recovery System (MACRS). Even though you did not physically lose money, you are able to report a loss on your taxes annually, reducing your taxable income*. This timeline starts when the property is placed in service making it ready and available for a specific use. Depreciation factors in that over time property deteriorates, loses value and needs repairs. Fortunately for real estate investors, you can also deduct these repairs!
Repair/Maintenance deductions include the costs of supplies and labor necessary to repair or maintain real estate investment properties. Repair/ Maintenance keeps property in a normal efficient operating condition; associated costs can be deducted in the year they are incurred. If the repair increases the value of the property, prolongs its lifespan or replaces a major component or structural part it is considered a Capital Expense and must be depreciated rather than deducted. If an item is currently being depreciated and has to be replaced, the remaining depreciation can be claimed that year through a partial disposition.
More straightforward, you can deduct the interest paid on mortgages secured by real estate, utility costs incurred from investment property; professional services costs (lawyers, property management) required to operate investment property, as well as property taxes and travel cost associated with maintaining your real estate investments.
Stocks do not reduce taxable income unless the investment is made through a retirement account, in which case you cannot access the profits prior to a predetermined age and you must contribute to the account annually to retain the tax reducing benefits. If you earn dividends from your stocks or own bonds that pay you interest you will be taxed on these even if you do not sell them. Whereas real estate deductions do not require physical loss of money to provide a deduction, stocks require capital loss where you have physically lost money. Retirement accounts also require annual contributions to reduce taxable income. Real estate can be bought once and provide deductions for many years.
Real Estate has distinct tax advantages compared to alternate investment vehicles. You are able to earn more money but yet pay fewer taxes effectively maximizing returns on each dollar invested. If you are ready to invest in real estate or would like more information please visit the ARE Holdings Group contact page or text “Why Real Estate?” to (516)-519-3869 so we can match you with the investment opportunity that best meets your needs.
*Depreciation deductions must be repaid when the property is sold in a process called recapture. This can be delayed temporarily with a 1031 exchange or indefinitely with strategic planning.
DISCLAIMER: ARE Holdings Group, LLC and it's affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Consult your own personal tax, legal and accounting advisers before engaging in any transaction.