The US Tax Code Allows Investors to Shelter Their Income With Real Estate – We’ll Share 4 Things You Should Know
1. Real Estate Is Unique When It Comes to Taxation
Real estate is the only asset class that depreciates on paper while it appreciates in reality.
Depreciation is a non-cash expense as it only exists on paper. No money needs to leave your bank account to pay for it.
The IRS allows residential real estate properties to depreciate over 27.5 years, which means every year a portion of the purchase price gets recorded and can be taken down as an expense.
Other assets depreciate too, but real estate is unique as the purchase price is high (allowing you to write off more) and usually it can be bought with debt (mortgages and other loans). This greatly enhance the benefit.
Depreciation can sometimes lead to a paper loss while the property actually generates positive cash flow
This “paper loss” can be used to offset taxable income from our sources and lower your tax bill.
2. The Long Term REI Game Pays Big with Taxes
A key strategy of a smart real estate investor is to buy and hold their properties. It turns out that the government rewards this move with substantial tax breaks.
- Real estate generally appreciates in value, but this appreciation is not taxed until it is sold. You always have the option to refinance against this appreciation and take equity out of deals, which can be reinvested or taken as a profit.
- While we hold rental properties, we continue to collect rental income. Rental income, like interest and dividends, is not subject to Medicare or Social Security taxes. At a W-2 job, you pay 7.65% (as of 2018) of your salary every year toward these taxes.
- Given most real estate properties are bought with debt, interest on the loan/mortgage can be deducted against rental income, so can insurance and property taxes.
- If you hold the property for more than one year, any profit on the property is taxed at a favorable long term capital gains tax rate of 0-20%, substantially lower than ordinary income tax, especially if you are in a higher tax bracket.
3. You Can Use Your IRA to Invest and Avoid Taxation
In some cases, you can also use your IRA money to invest in real estate and avoid taxable events. If you want to learn more about this, read our article about using self-directed IRA to invest HERE.
4. The Tax Cuts and Job Acts of 2017
This set of laws has made real estate investing more favorable, providing accelerated depreciation and new tax breaks. We won’t go into further detail here, but if you’d like to find out more, please contact the Akras Team and set up time to talk.
Interested In Investing In Real Estate or Want to Learn More?
If you’d like to explore passively investing in real estate with Akras, let’s start a conversation. Get started by taking these steps:
- Educate Yourself: Read our article about investing in syndications.
- Discover Investment Capital: Learn about converting your 401K into an SDIRA.
- Get Started: Create an Akras Insider Investor Profile.
- Connect: Book a time to discuss your goals and our investments.
We’re looking forward to connecting with you and please reach out to our team with any questions.