What Are The Potential Tax Benefits of Real Estate Investing?

Opportunities that are a good fit for your portfolio may vary based on your existing portfolio and your overall objectives. Potential tax benefits may vary across these primary classifications for real estate investments.

Investing in commercial properties includes multifamily properties, retail spaces (shopping centers, etc.), office buildings, and industrial real estate properties (e-commerce warehouses, etc.) Tax benefits of commercial real estate may include the 1031 exchange, depreciation deductions, capital gains tax, and more.

At Thoroughbred Ventures, we specialize in identifying and bringing to life innovative commercial real estate investments that offer lucrative opportunities for financial growth. These projects offer more diversity, higher yield, lower upkeep risks, and higher exit returns.

Investing in residential real estate includes house-flipping, rental properties, land-flipping, property development, and vacation rentals. Depending on the terms, these are smaller properties that can offer a good ROI, cash flow, and some tax deductions for real estate investors, including tax-deductible expenses, depreciation, appreciation, the use of the 1031 exchange, and more. The right projects in this category can be associated with high earning potential.

The range of tax benefits real estate investments offer is significant and extensive. We’ve curated a list of the top six benefits our accredited investors leverage annually.

Most real estate investment properties (commercial and residential) come with a host of deductible expenses. Some examples include mortgage interest, property management fees, maintenance, repairs, utilities, property taxes, insurance, legal fees, advertising costs, and other qualified business expenses. Many of these are tax write-offs that can help reduce operating costs, lower your taxable income, and increase the overall profitability of your investment.

If your real estate investment has increased in value when you sell it, you may be required to pay taxes on the profits earned. Several factors can alter what that looks like from investment to investment, including filing status, how long it has been in your portfolio, and more.

There are built-in tax thresholds associated with the capital gains tax that could range from 0% to 20%. If you’ve held a property for less than a year, you’re more likely to pay a higher tax rate (according to your earned income) rather than 0% to 20% for long-term capital gains. The more profitable play is to hold real estate investments for more than a year to see the highest tax advantages.

The 1031 exchange allows real estate investors to exchange one investment property for another rather than starting fresh with a new property. With this built-in loophole, you can continue to roll over capital gains taxes until you sell the property, but only if it has been in your portfolio for more than a year and all IRS criteria are met.

The laws affecting real estate investors and small business owners were solidified in 2017 under the Tax Cuts and Jobs Act, also known as the qualified business income deduction (QBI) or the pass-through deduction.[1] Investors, LLCs, S-corps, and sole proprietors holding cash-flow real estate properties may qualify for a 20% deduction of any passive income generated, including tenant payments and rental income.

In order to stimulate economic growth and stability, the government rewards those who invest in what they call opportunity zones. These are generally low-income or rural areas that need new life injected into their economy to thrive. Investors can take advantage of opportunity zone investments and simultaneously roll those into capital gains tax advantages within 180 days of the property sale.[2]

Working for yourself can be more costly from a tax perspective. However, rental income is not calculated as part of the required 15.3% of your taxable income, keeping more money in your pocket. Additionally, up to 7.65% of other income earned while self-employed is tax deductible and helps reduce your tax liability.[3]

While the tax benefits real estate investments offer are substantial, there are other reasons to pursue residential or commercial real estate investments.

• Lower Volatility: The publicly traded market is only so predictable, but real estate is a tangible constant. Regardless of what the market is doing, private real estate investments can help you increase capital without constant churn and upset.
• Cash Flow: Real estate investments, especially commercial properties or multifamily units, generate significant cash flow from sales, rent, daily operations, and more.
• Diversification: You don’t want all of your eggs in one basket, so they say. Explore something that offers less volatility than other traditional ventures, like stocks and bonds.
• Appreciation: All real estate properties are considered assets. When purchased prudently and handled well, they appreciate value. With improvements and time, they offer strong exit strategies.
• Hedging Against Inflation: One of the best benefits of cash flow real estate is that it’s like a faucet you can turn as needed. When inflation escalates, you can increase the cash flow to match and keep your profits safe.