1. Write Off Real Estate to Decrease Taxes
DEPRECIATION. This word carries such a negative connotation, but in tax code, it is a gift afforded to owners of investment real estate. The IRS allows real estate investors to depreciate (write off) a portion of the value of their real estate every year. This tax advantage often translates into receiving 30% of your rental income free of federal, state and local taxes. This “depreciation” is allowed even though, with proper maintenance and under good market conditions, the value of the property is actually appreciating.
Reducing Taxes While Increasing Cash Flows
If you’re an experienced rental property owner who benefited from depreciation, be aware that the IRS might want some of that money back when you sell. Depreciation is one of the most significant and most advantageous deductions for real estate investors because it reduces taxable income but doesn’t reduce your cash flow–a magical tax deduction. The IRS allows real estate investors to depreciate an investment property over a period of 27.5 years for residential rental investments, ultimately saving landlords thousands of dollars in taxes every year.
2. What is a 1031 Exchange?
The uber-wealthy create, store and transfer wealth in commercial real estate. One of the principal reasons for this is the favorable tax consideration offered by Section 1031 of the IRS code. Often referred to as “a 1031 exchange”, this section of tax code allows owners of investment or business real estate to defer taxes due upon the sale of the property and reinvest the proceeds from the sale in investment real estate of equal or greater value. Taxes that need to be paid on depreciation recapture, federal capital gains, state taxes, and NIIT are all deferred.
Tax and Worry-Free Investment Strategy
If you own investment real estate and are looking to sell, you’ll want to become very familiar with the pending tax liability and potential strategies to defer these taxes. Many investors consider taking advantage of a 1031 exchange. Effective use of a 1031 strategy allows investors to create, store, and transfer wealth tax-free. It would be best if you planned in advance to take advantage of this deferment strategy. You should always contact a 1031 exchange specialist before selling your current property.
To learn more about how you can utilize these tax advantage methods with your next CRE investment, visit millcreekcommercial.com to set up a consultation.