Tax Benefits of Real Estate Investment

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Many people think of investing in real estate as risky. And it is if you don’t know what you are doing. But if you do your homework and act wisely, the rewards can be huge—financial, psychological, even spiritual. So here are some things to keep in mind when considering this investment opportunity:

The benefits of owning a home go way beyond the financial advantages (though they are significant).

You will also enjoy tax breaks that most renters never get to take advantage of. If you plan on living there for at least three years, your mortgage interest and property taxes will all be deductible from your income taxes each year. Plus, depreciation benefits allow you to deduct an amount equal to 20% of the cost of the building from your taxes each year. The value of the deduction increases as the building depreciates over time.

mini house with family and bags of money

Tax Benefits of Real Estate Investing

When you buy a house as an investment property, some tax benefits are similar to those available for homeownership. But there are also significant differences.

Both single-family and multifamily homes offer tax advantages. For example, the deduction of mortgage interest and property taxes is allowed no matter which type of real estate investment you choose.

Here are the top tax benefits of real estate investing.

Tax Benefit 1: Mortgage Interest and Property Taxes Deductions

Homeowners can deduct the interest and taxes paid on their mortgaged property from their total income each year. This rule applies to single-family homes, multiple dwellings, or even a boat! Your home must be your primary residence—that is, you live in it for most of the year, to be eligible for this deduction

Tax Benefit 2: Depreciation Tax Deductions

When you own a single-family residence and rent it out, you can deduct an amount equal to 20% of its cost from your taxes each year. The deduction increases as the building depreciate. For example, if you bought a house for $200,000 and rented it out for ten years, you would be able to deduct $20,000 from your income tax during that time.

Tax Benefit 3: Losses on Real Estate Sales

If you sell real estate at a loss (the sale price is less than the combined mortgages plus other costs of sale), you can deduct the loss from your total income for tax purposes. This is an excellent benefit if you have other sources of income to make up the difference.

Tax Benefit 4: Sale of Property by Inherited Heirs

Property inherited from a deceased person can be sold immediately without paying federal taxes on all or part of its capital gains. However, if someone holds the property for at least one year before being passed down, it is considered a long-term investment, and any capital gain will be taxed at 15%.

Tax Benefit 5: Investment Tax Credit

If you buy real estate to rent out, you may qualify for an investment tax credit of 10% on some assets depending on the number of units you buy. For example, if your building is at least ten years old and contains four or more residential units, you may qualify. This tax credit can be precious when you sell the property in a few years.

Tax Benefit 6: Additional Benefits

Finally, real estate investors avoid many of the pitfalls that plague other investments. They can also take advantage of unique benefits such as favorable depreciation schedules and interest deductibility on related business transactions. Plus, they don’t have to pay taxes on their profits until they sell the buildings (or even not at all).

The Bottom Line

While real estate investing is quite different from day trading stocks or buying mutual funds, it offers some decisive advantages that set it apart from most other investment opportunities.