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Tax Benefits Available to Investment Property Owners

Most investors know that buying investment real estate can be a great way to generate an additional source of income and diversify their portfolios. But did you know that owning investment property may also provide significant tax advantages?

From taking advantage of allowable tax deductions on the property you have just purchased to potentially deferring taxes owed when you are ready to sell, there are several tax benefits you should know about. The key lies in understanding these benefits and knowing how to make them work for you.

Sometimes, the opportunities for tax savings aren't as apparent as you might think. While you will want to do some research on your own, you should consult with a tax professional when considering an investment property purchase. 

The potential savings you may realize from available tax benefits are well worth the time and effort you spend now in familiarizing yourself.

Whether you are purchasing your first investment property, or you already own an extensive portfolio of real estate investments, this brief introduction to the tax benefits afforded you as an investment property owner.

1. Deductions

When you own an investment property, you can typically deduct various expenses related to its operation and upkeep. These expenses include property taxes, insurance, management fees, and mortgage interest.

In addition, you may be able to deduct the cost of capital improvements, property repairs, and ongoing maintenance. Advertising costs such as expenses related to listing your rental property or marketing it for sale are also typically deductible. 

2. Depreciation

After you've owned your investment property for a year or longer, in most cases you'll be able to take advantage of property depreciation. This allows you to take a tax deduction for the property's loss of value over its expected lifetime. For example, you may depreciate it over 27.5 years if you own residential property. Commercial properties depreciate over 39 years. You can also depreciate certain capital expenses, such as installing a new HVAC system or replacing the property's roof.

3. Pass-Through Deduction

The IRS categorizes income earned on rental properties as "passive income." Before the 2018 Tax Cuts and Jobs Act, passive losses were the only way to offset this income. However, since the Act was passed, you may now be able to take advantage of a "pass-through deduction."

If you meet specific requirements, you may be able to deduct 20% of your net rental income from your taxes or 5% of the original cost of the property and 25% of employee payroll expenses. This deduction began in 2018 and is scheduled to continue through 2025.

4. 1031 Exchange

When you sell an investment property for a profit, you'll typically owe capital gains and depreciation recapture taxes. However, many investors sell a property with the intent of buying a new investment property of higher quality or better income-generating potential. 

The IRS allows investment property owners to defer capital gains and depreciation recapture taxes on the sale of an investment property when "exchanging" it for a 'like-kind' property. That is why many experts have described the 1031 exchange as one of the greatest wealth-building tools available to investment property owners.

The 1031 exchange provides the opportunity to defer taxes indefinitely (as long as any future investment property sale occurs using a 1031 exchange.) In addition, many attorneys and tax consultants consider the 1031 exchange an effective estate-planning strategy because the rule allows for eliminating all taxable gain obligations upon the property owner's death.

Explore the Benefits of Property Investments

Tax benefits are just one of the potential advantages of owning an investment property. If you would like to explore your options further, the experienced real estate and investment professionals at FGG are here to help. Contact us today to schedule a consultation.

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Help Save 1031 Exchanges
Write to your Member of Congress and Senators urging them to oppose restricting Section 1031 like-kind exchanges. As part of the American Families Plan, the Biden Administration has proposed eliminating the application of Section 1031 for gains greater than $500,000. Like-kind exchanges have been part of the U.S. tax code since 1921 and are one of the tax code’s most powerful economic tools. It is critical that we all vigorously and visibly oppose this proposal. Make your voice heard with a pre-filled letter, which you can customize to add personal anecdotes or powerful client stories to highlight the positive impact of Section 1031 like-kind exchanges. Take action today by clicking HERE.

Paul Getty

Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $3 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student, and senior housing. Paul’s transaction experience includes buy and sell side representation, sourcing and structuring of debt and equity, workouts, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions. Paul also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals. Prior to founding First Guardian Group/FGG1031, Paul was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 35 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion-dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M. Paul holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered financial representative with LightPath Capital Inc, member FINRA /SIPC. Paul is a noted speaker, author, and actively lectures on investments, sales, and management related topics. He is author of The 12 Magic Slides, Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors, and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.

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