David Askar on The Tax Advantages of Real Estate Investment
By: Dream Tree Inc.
OPERATIONAL EXPENSES. Whether it is a single rental house or a massive mixed-use development, a real estate investment is a business. As such, every expense - utility bills, repairs, management fees, legal fees, property taxes, insurance, even cost of travel to visit the property - is deductible from the investor's taxable income. This requires the right entity structure and, most likely, a consult with a tax professional. Even the CPA fees are deductible.
MORTGAGE INTEREST. If the property was bought with a mortgage, the interest on that mortgage is also a deductible expense. So, for that matter, is the premium on mortgage insurance (PMI) an investor might owe if he or she put less than 20% down.
DEPRECIATION - THE "PHANTOM DEDUCTION." The IRS allows a property owner to claim "depreciation"
DEFERRING CAPITAL GAINS WITH A 1031 EXCHANGE. If an investor sells a property for more than he or she paid for it, the investor usually owes taxes on the "capital gains," just like if you sell a stock for more than you bought it for. With leveraged equity (real estate bought with a mortgage) this can be a huge profit that results in a huge tax bite. For long-haul investors, an appealing alternative is written into the Internal Revenue Code.
Section 1031 of the IRC allows an investor to purchase a like-kind property with some or all of the profits of the sale. However much of the profits he or she reinvests, the taxes on those capital gains are deferred. This is referred to as a "1031 Exchange."
Put another way, an investor who makes a killing selling a rental house could flip those profits into a 10-unit apartment complex; the profit from selling that 10-unit complex into a 50-unit complex; and so on.
This makes real estate a phenomenal long-term wealth building strategy. Just remember, if profit is ever taken out of the chain of investment and put in the investor's pocket, it is immediately taxable.
Strict time limits and reporting deadlines apply to the interim period between the sale of one property and the purchase of the next. It can be well worth it to hire a lawyer who specializes in Section 1031 to ensure that the exchange goes smoothly.
Learn more at: http://www.TheAskarReport.com
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Page Updated Last on: Mar 29, 2019