Every savvy investor knows that diversification is important for long-term capital growth and most importantly portfolio preservation. While there are many ways to diversify your investing your portfolio, real estate remains one of the most popular options given its many advantages.
Real estate is one of those asset classes that everyone dreams of having exposure to, mainly for the recurring cash flow and relatively strong and consistent returns it has historically provided.
But beyond being able to make money in real estate, real estate investing offers additional benefits in the form of tax advantages.
In this article, we’ll look at five tax benefits and opportunities of investing in real estate which can be incredibly useful for any current or up and coming real estate investor.
Tax benefits of investing in real estate
1.) Passive income & pass-through deductions
A pass-through dedication allows an individual to deduct up to 20% of one’s business income (if qualified) on your personal taxes. If you’re the sole proprietor of a rental property via a partnership, LLC or an S Corp, the money you collect is generally considered a qualified business income according to real estate tax law. At scale, this tax benefit can really add up!
2.) Depreciation tax deductions
The depreciation deduction as it pertains to real estate, allows investors to recover the cost of income-producing property through yearly tax deductions. Essentially, the IRS provides you with an allowance for wear and tear of a property. The three factors which determine the amount of depreciation someone can deduct includes:
- The value of the property;
- The property recovery period;
- The depreciation method used.
The method investors typically use is called the Modified Accelerated Cost Recovery System or MARCS. This allows investors to deduct depreciation on a piece of residential property for 27.5 years and 39 years for commercial property.
