When it comes to investing for the purposes of growing your wealth, you have options. Some might even say you have options galore.
There are stocks and bonds, mutual funds, CDs, options, annuities, and whole life insurance.
There are different retirement savings plans and strategies, including 401ks and IRAs.
You can invest in businesses and take an ownership stake in different types of ventures.
There are even digital assets, like cryptocurrency and NFTs. The list goes on and on.
But if you take a poll of the wealthy – the folks with seven-, eight-, and nine-figure net worths – you’ll find that they almost all believe in one type of investment above all else. I’m talking about real estate.
While any successful investor believes in diversification, it’s difficult not to play favorites.
Make no mistake about it, real estate is a favorite investing tool for the wealthy class. But it’s not exclusively reserved for people with massive bank accounts. Anyone – including you – can invest in real estate.
And the tax benefits associated with real estate are just one reason why you should do so.
There are dozens of reasons to invest in real estate, including:
But, truth be told, most of these benefits pale in comparison to the tax advantages that you get when investing in real estate. If nothing else, these benefits are amplified by these tax benefits. So I’ll use the rest of this article to explore what they are and why they matter.
There’s not just one tax benefit you get with real estate investments. There’s a whole list of them. And depending on the type of property and how you structure the investment, you may benefit from any or all of the following:
There’s a long list of deductions you can take when investing in real estate. For each property that you own, you’re able to deduct things like mortgage interest, property taxes, property insurance, property maintenance, property management fees, etc. This alone, can increase your rate of return and make an investment worth your time and money.
When you sell an investment for a profit, you owe taxes. One perk of owning real estate is that gains are taxed on a capital gains basis, rather than being taxed as ordinary income. This automatically qualifies you to pay a lower rate. And if you hold your investments for longer than a year, you can qualify for long-term capital gains taxes (either 0 percent, 15 percent, or 20 percent, based on income).
One of the biggest tax breaks of owning investment real estate is depreciation. (Some would even say it’s the most important one.) This is a tax break the IRS uses to acknowledge that assets, like a house, wear down over time. For residential properties, investors are allowed to depreciate the property over a period of 27.5 years. Using round numbers, that means you could deduct up to $7,272 per year on a property that costs $200,000. In other words, you get to shield that amount of your income from the IRS each year. There are obviously a ton of rules that come with depreciation, but this is the basic gist.
The 1031 Exchange is a special part of the IRS tax code that allows you to defer paying taxes on the gains of an investment property by putting those proceeds into another property within a certain period of time. This basically lets you kick the “can” down the road as far as you’d like.
All employee income is subject to a 15.3 percent FICA tax. Typically, your employer pays for half of this. However, if you’re self-employed, you have to cover the whole thing. Interestingly enough, the IRS doesn’t view rental real estate as self-employment business activity. This means it’s not taxed as “earned income.” The result? You get to keep a bigger portion of the net profit.
These are just some of the basic tax benefits. If you meet with a real estate tax professional who strategically structures real estate investments for a living, you may find a handful of other property-specific deductions or tax breaks. But no matter which way you slice it, the savings are significant.
At InvestNet, we believe in empowering everyday investors like yourself to find strategic investment opportunities that may allow them to build wealth and security for your family.