Investing in real estate can boost your passive income, diversify your portfolio, and potentially provide superior returns over the long term. However, acquiring and maintaining rental properties can be a costly endeavor. Fortunately, the government offers a variety of tax deductions and incentives that can help make these investments more affordable.
In addition to depreciation, mortgage interest, and property management fees, the IRS allows investment property owners to claim a range of other expenses as tax deductions. These include a variety of maintenance and repair costs, utilities (including charges and usage), legal and accounting fees, and even land tax, council rates, and water rates (but only for the period that the property is rented out). Maximizing these deductions can significantly reduce your taxable income and increase your investment property returns. Also read https://www.acompanythatbuyshouses.com/sell-my-house-fast-grand-prairie-tx/
Another major investment property tax benefit is the ability to deduct the cost of capital improvements. These deductions can add up over the life of a building, reducing your tax liability. However, it is important to consult with your accountant before claiming any capital improvement deductions, as the rules and regulations surrounding these deductions can be complex.
If you decide to sell your investment property, the profits from the sale will be subject to capital gains taxes, which vary by tax bracket. This is based on the difference between your selling price and your adjusted tax basis in the property, which includes the original purchase price plus the cost of any renovations and improvements you’ve made. However, you can defer these taxes by reinvesting your proceeds into a new property of equal or greater value, as allowed by Section 1031 of the Internal Revenue Code.
Many investors take advantage of this deferral benefit as often as possible, using it to grow their real estate portfolios without paying immediate tax liabilities. However, the IRS requires that the replacement property be of “like-kind” to the property you sold it must also meet certain other requirements in order to qualify for this tax deferral.
Another investment property tax benefit is the Opportunity Zone program, which can offer significant capital gains tax advantages to investors. This program incentivizes investment in economically distressed areas, allowing investors to avoid taxes on future appreciation and deferring the payment of capital gains taxes. However, this program is highly structured and complex, and the benefits of investing in Opportunity Zones should be carefully weighed before making a decision.
There are a number of other investment property tax benefits, including the new Qualified Business Income deduction and depreciation recapture. These can be incredibly beneficial, but the most effective way to optimize your tax savings is to partner with an experienced CPA firm that can help you identify and take advantage of these opportunities. Contact Lewis CPA today to learn more about the numerous investment property tax benefits available to you. Our team can help you maximize your profits while ensuring compliance with complex tax regulations. Our firm has decades of experience in real estate and can assist you with the full spectrum of your accounting needs.