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November 24, 2021

Tax Benefits of Real Estate Investing

Real estate investing has a long list of benefits for many investors, but few people are aware of the specific tax benefits, too. Real estate investing typically includes buying properties for investment purposes, which are most often used to generate income through long-term or short-term Airbnb rentals.

Written by
Amberstone
Published on
December 8, 2021
Category
Accounting

Expense Deductions

The first tax benefit of real estate investing is the ability to deduct qualifying expenses. You get to deduct any expense directly related to the management and maintenance of the property. 

Some common expenses include property taxes, property insurance, mortgage interest, repair and maintenance costs, property management fees, advertising, and accounting fees. All of these expenses can offset the rental income and reduce your taxable income. Essentially, real estate investment can pay for itself when rental income exceeds expenses and may even give you some extra income in your pocket each month. 

Depreciation of Qualifying Property

Just like you can deduct qualifying expenses, you can also depreciate your investment property. Qualifying real estate investments are usually depreciated over 39 years on a tax return. As a result, this can further reduce your taxable income. 

It’s worth keeping in mind that land itself doesn’t depreciate and depreciation on the real estate investment reduces your cost basis. When you go to sell the property, you will have a lower cost basis, potentially resulting in a higher gain on the sale. However, long-term gains are taxed at more favorable rates. 

Qualified Business Income Deduction

There are two ways a real estate investment property can be reported. The first way is on a Schedule E on the individual tax return. The other way is by setting up a separate LLC or Partnership that holds all the real estate investment information. 

Setting up a separate company to house your real estate investment can give way to a special pass-through deduction, known as the Qualified Business Income Deduction. The Qualified Business Income Deduction allows you to deduct up to 20% of qualifying income through 2025. There are some limitations so be sure to consult your tax advisor for further details. 

Self-Employment Tax Savings

Another key tax benefit of real estate investing is the bypassing of self-employment taxes. Real estate investments are usually passive income, making the income received non-taxable as self-employment income. 

The income you receive from real estate investments is not earned income and therefore not subject to any self-employment taxes. If you accumulate enough real estate investments to generate a steady income, you may have the ability to focus solely on your real estate business to bring in a livable wage and avoid self-employment taxes altogether. 

Real estate investing can be a great way to diversify your wealth portfolio. The tax benefits available for real estate investments can be great. With the housing market booming and a wide variety of people looking for rentals, now might be the right time for you to take the leap of faith. You don’t have to embark on this journey alone. Amberstone Consulting is available to consult you on any questions you may have relating to the tax benefits of real estate investing.

Amberstone Consulting

If you're looking for professional finance and tax advice, Amberstone Consulting has your back with our many years of experience in helping our clients with their finances.

We are dedicated to providing expertise to your business and are on hand to manage all your paperwork and taxes. 

If you require finance and tax assistance, we encourage you to reach out to our team here today.


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