Real Estate is one of the most tax favored investments there is, investment real estate provides more tax benefits than almost any other type of investment. Here are a few categories to think about that impact your tax benefits.

  1. Interest Deductions
  2. Depreciation: For Residential properties 27.5 years. For Commercial it is over 39 years.
  3. Repairs: Hire these out if possible and you can deduct not only the supplies but the labor as well.
  4. Local or Long Distance Travel: airfare, hotels, meals and other expenses
  5. Home Office
  6. Employees and Independent Contractors
  7. Insurance
  8. Professional and Legal Services: property managers, attorneys, accountants and others

In Real Estate you will find the two most significant tax breaks available to U.S. taxpayers. Homeowner incentives and Investor incentives.

  1. Homeowners selling their primary residence are able to exclude $250,000 of proceeds if filing single and $500,000 for married couples. You must live in the home 2 of the last 5 years.
  2. Investors have several key areas of tax benefits.
    1. Deductions for expenses incurred in operating the rental business. 
    2. Investors can deduct interest on loans used to acquire and repair rentals.  
    3. Accelerated Depreciation of components of the properties. ex. carpeting, flooring, appliances, blinds, driveways, landscaping, patios, fencing, etc... 
    4. 1031 Tax-Deferred Exchanges 
    5. Investors can use their Self-Directed IRA's to buy investment real estate or fund loans to others that are secured by real estate.

1031 Tax-Deferred Exchanges

An IRS tax-deferred exchange is a section of the US tax code that enables an investor to defer capital gains tax due upon the sale of an appreciated investment property by using the equity to purchase another income property. There are a significant number of rules so work closely with your tax advisor and with an experienced qualified exchange intermediary.

There are four parties to the 1031 tax-deferred exchange:

  1. Exchanger (seller of property A and buyer of property B)
  2. Buyer of property A
  3. Seller of property B
  4. Qualified  Intermediary (QI)
    1. Must be registered with the IRS
    2. Cannot be related to the Exchanger or in business with the exchanger in the last 2 years.

For the exchange to be completely tax-deferred the replacement must:

  1. Be equal or higher in value
  2. Be acquired with equal or more equity
  3. Be acquired with equal or more debt

There are three rules of identifying replacement properties:

  1. Three Property Rule: any 3 properties of any value to satisfy the value requirement, not all properties have to be purchased
  2. 200% Rule: any number of properties as long as the total value does not exceed 200% of the relinquished property value, not all properties have to be purchased
  3. 95% Rule: any number of properties as long as 95% of identified properties are purchased to account for 95% of the value.

45 Day Rule: exchanger must identify the potential replacement properties within the first 45 days of the 180 day exchange period. If you do not identify in 45 days from closing the deal is considered a sale and you owe taxes. There is NO extension of the 45 day clock for any reason, weekends and holidays ARE included in the timeline.

*The above information is data I have gathered through my experience and is not necessarily true today. Tax code is always changing. I am not a CPA or Tax Attorney. For any guidance and advice around these topics please consult the appropriate, licensed professional.