5 Tax Advantages of Owning Real Estate

Summary

There are many pros and cons of owning real estate that we discuss on Better Life + Finance. Some of our favorite pros to investing in real estate are the tax advantages! We were amazed in our first year of owning our first multifamily property how much our taxes were positively impacted just by owning our home. This article discusses 5 advantages to owning real estate.

Owning real estate can provide several tax advantages, including:

1. Mortgage Interest Deduction: If you have a mortgage on your property, you can deduct the interest paid on the mortgage from your taxable income. This deduction can be significant, especially in the early years of the mortgage when most of the payment goes towards interest.
   
   
   
2. Property Tax Deduction: Property owners can also deduct property taxes paid on their real estate from their taxable income. This deduction can also be substantial, especially in areas with high property taxes.
   
   
   
3. Depreciation Deduction: Another tax advantage of owning real estate is the ability to take a depreciation deduction for the building and improvements on the property. Depreciation is a non-cash expense that reduces your taxable income and can provide significant tax savings over time. This only applies to income producing properties, you cannot depreciate your primary residence. Residential properties are depreciated over 27.5 years - which means that your total basis - or investment - in the building (not the land) gets divided by 27.5 and that amount is deducted from your taxable income each year. For commercial real estate, the timeline is 39 years. 
   
   
   
4. Capital Gains Tax Exclusion: If you sell your primary residence, you may be eligible for a capital gains tax exclusion of up to $250,000 for an individual or $500,000 for a married couple. This exclusion can be used once every two years, and can provide substantial tax savings.
   
   
   
5. 1031 Exchange: A 1031 exchange allows real estate investors to defer paying capital gains taxes on the sale of one property if the proceeds are reinvested in a similar property within a specific timeframe. This can provide significant tax savings and allow investors to grow their real estate portfolios without incurring large tax liabilities.
   
   
   

Overall, owning real estate can provide significant tax advantages, but it is essential to consult with a tax professional to understand how these tax benefits apply to your specific situation.

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+ Better Tip

When we purchased our first multifamily home, we were referred to a local accountant who works with many real estate investors and owns real estate themselves. We have been working with this CPA ever since and continue to refer our friends and clients to them. We learned that once you add real estate into the mix, personal taxes become a lot more complicated and the opportunities to miss crucial deductions greatly increase. We have peace of mind knowing that a professional is handling the annual documentation of our rental property activities and it is completely worth the cost of the tax service. We keep track of our expenses and income throughout the year and then hand that data off to our CPA and let them work their magic. Our Better Tip? Leave tax returns to the professionals and enjoy your day!