4 Real Estate Tax Strategies That Can Help Protect Investors From Inflation

Depreciation

Depreciation is one of the best benefits of being a real estate investor, but what is depreciation? The IRS lets investors take a write-off on the purchase price of the home over a number of years. Essentially the tax code operates under the idea that there’s wear and tear on the building that you own. As a result, you are allowed to write off a portion of the initial purchase price over a certain amount of years. For most residential investments, depreciation allows you to write off the home after about 25 years. For commercial properties, like office buildings and shopping centers, the IRS allows us to write those off over around 40 years.

Appreciation Tax Benefits

As real estate investors, we do not need to pay taxes each year as a result of appreciation. That money is growing for us without any tax drag. Let’s say that you wanted to gain all of that equity that has now been built up on your property as a result of inflation. You can do a cash-out refinance on this property and not have to pay taxes on that cash currently. For example, what if you decided to take out $60,000 from a cash-out refinance and utilize that to buy more real estate? Not only do you not pay taxes on that $60,000 currently, but you also would be able to deduct the associated interest expense against your rental income.

Expense Deductions

With real estate investing, you are a business owner through the eyes of the IRS. What this means is that you can take advantage of the tax benefits awarded to any other business owner under the tax code. It’s important to understand that we are not talking about organizations, like LLCs or corporations, with the term “business”. We’re talking about being in the real estate investing business. Many of the common expenses that you can use are applicable regardless of whether your property is owned individually or in a legal entity. As an investor, you’re able to deduct all of the necessary expenses related to any of your real estate investing. In addition to expenses like interest, taxes, and insurance, you also get to deduct other expenses for your property. There are a whole slew of things that could be tax-deductible against your rental income.

1031 Exchange

As real estate investors, another popular tax benefit has been the chance to sell appreciated rentals. Being able to defer capital gains taxes using a 1031 exchange is a game changer. This strategy lets investors sell one appreciated rental property and defers the associated capital gains taxes by reinvesting it into another property. In order to receive these tax deferral benefits, there are a couple rules. You have to identify the next property within 45 days. You have 180 days from the date of sale to close on your next property. The purchase price of the new property must equal or be higher than the sales price of the sold property. Lastly, the equity in your new property must equal or be higher than your equity in the other property. As long as the transaction is completed correctly, you can defer all of the taxes on the sale of your property.