Commercial real estate can be one of the most tax-advantageous investments in traditional investment. Its most potent tax advantages are reduced capital gains, mortgage interest deductions, accelerated depreciation, and the option to pass assets to heirs tax-free. In addition, ingenious investors can use their tax deductions or savings to buy new assets that generate cash flow. Here are a few more well-liked strategies for using real estate investments to postpone, lower, or even eliminate your tax liability. For guidance on how these goods will benefit you, always consult a tax expert.
Depreciation
Depreciation is the gradual decrease in the value of a property over time. The IRS allows you to deduct 1/27.5th or 1/39th of your commercial real estate value each year from your annual tax payment, regardless of whether you need to utilize the deducted funds to repair or renovate the property.
Lowering Capital Gains
Traditional long-term capital gains are subject to the 20% tax rate, which is significantly lower than short-term capital gains. Choosing the right investment vehicles and techniques can help you avoid paying taxes on that income altogether, or at least postpone them, so you don’t have to pay more.
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Zero FICA taxes
As a real estate investor, you must pay FICA taxes if you receive income from your real estate project. However, you may be able to write off up to $25,000 in losses as long as you’re “materially engaged” in business operations. This is one instance where having a little income from your project can actually help you save money on taxes.
Exchanges 1031
The primary benefit of a 1031 exchange is that it allows you to postpone paying capital gains taxes on the sale of your property. You can also use this exchange process to buy or sell a “like-kind” investment property, meaning you do not have to sell or buy a place simultaneously. However, there are certain limitations to doing so: The minimum investment amount for 1031 exchanges is very high (around $1 million), and the holding period is more extended than usual—one year, according to IRS guidelines.
Any money received from the sale of a property must go through a qualified intermediary rather than going straight to the seller since the money is still subject to tax. By holding any sale profits until the seller of the property receives them, the qualified intermediary enables the 1031 exchange. Within 45 days, the investor must find a property to buy, and the deal must close in 180 days. For example, you cannot trade a multifamily property for shares in a REIT or a retail shopping center for precious metals. Instead, eligible assets for tax deferral must be of a similar kind.
Conclusion
As shown above, real estate is a very tax-advantageous asset class compared to well-known investment vehicles, such as shares, bonds, precious metals, etc. Recall that investors must take aggressive steps to get real estate tax benefits, whether by an independent investigation and due diligence or consulting with real estate and tax experts. When correctly leveraged, real estate tax advantages can produce significant profits in addition to simple property appreciation and rental revenue.