While traditional assets, including mutual funds, CDs, stocks, and bonds, make for good investments, they do not necessarily come with many possibilities for tax breaks. On the other hand, investors can find plenty of tax benefits through real estate investing. Not only do you find tax advantages from owning your own home, but there are additional tax benefits to owning an income property.
Income Property Tax Breaks
Income properties can be anything from a residential to a commercial property that was purchased and developed for the intention of leasing, renting, or price appreciation. And if you are the landlord of an income property, then these are some tax benefits that you can potentially claim on it.
Most importantly, your rental income is taxable, and there are lots of ways to decrease your taxable rental income. You can write off a significant amount of operating expenses related to owning, operating, and maintaining the property. A few of these expenses can include the costs of maintenance, repairs, and upkeep, as well as the cost of utilities. It can also include travel costs associated with checking in on your property, the cost of advertising and screening potential tenants, pest control, or fees paid to a property manager. It does not include the cost of improvements to restore the property or adapt it to a different use. However, improvement costs can be recovered through depreciation.
Another tax break on income properties includes deductions on property taxes, as well as any interest on a mortgage you may have taken out for the property. Together, all of these aspects can greatly decrease the taxable rental income on your property.
Additionally, depreciation may also be deducted over time. This tax break is related to the perceived decrease of value in the real estate investment that occurs naturally over time. While the perceived value of the investment may decrease, you may be taking in the same or an increased amount of rent, which would lead to a larger tax break. On the other hand, should your income property investment increase in appreciation over time, that tax break may not be available to you.
SDIRA & LLC Tax Breaks
Another way to further your tax benefits can be found in your approach to owning your income property. Although you should be sure to first seek information from a tax professional, it may be a good option for you to own your income property via a self-directed IRA (SDIRA) or through an LLC.
Using a self-directed individual retirement account (SDIRA) to purchase property is a great way to realize some additional real estate tax breaks. Although this process requires some extra steps in order to open up an account, upon first deposit, the account will be tax-deferred until the money is withdrawn. Depending on the account and your investments, there may be some other tax breaks available as well.
Another way to find tax benefits through owning income properties is to set up an LLC, or limited liability company. An LLC not only creates a legal structure to shelter its owner from the personal responsibility of the company’s obligations and debts, but it also comes with its own tax benefits. For instance, LLCs can be worked out to have the additional advantage of being taxed at the rate of the individual instead of the corporate rate. This allows your profits to move through to IRAs or another type of self-directed savings account.
Should you look into creating an LLC, do your due diligence and consult legal counsel to make sure that this kind of entity would be beneficial according to state laws. You should also check into building the LLC according to IRA parameters so that you can get the potential tax benefits without incurring legal issues.
While there are many ways to invest, the tax benefits associated with owning properties makes real estate investing a very attractive option. You just need to make sure that you are taking advantage of all the tax benefits that are available to you.
High Return Real Estate can help you cash in on the full scope of benefits associated with real estate investing. We offer property investment opportunities that are not available elsewhere, and our CASHFLOW+ program is designed to grow your real estate portfolio while putting more money in your pocket right now.