Real estate is an extremely popular asset class among the wealthy. In addition to stocks and bonds, wealthy investors often have significant direct real estate investments within their portfolios, whether that be residential, commercial, or industrial. Likely the biggest reason for direct real estate investing is diversification. However, the tax benefits of real estate investing offer immense benefit through tax benefits – boosting returns compared to other assets. Thankfully, you don’t have to be wealthy to enjoy the tax benefits of real estate investing, and for many, real estate investing is more comfortable to engage in than stocks and bonds. So, what are the tax benefits?
An Overview of Tax Benefits
The tax benefits of real estate investing can be summed up as “deductions, depreciations, and capital gains.” Each of these offers significant tax advantages to real estate investors and are explored in more depth below.
Tax deductions are one of the great advantages of real estate. A tax deduction is an amount that can be deducted from your taxable income. Generally, the following expenditures are tax-deductible in real estate: mortgage interest, property tax, operating expenses, depreciation, and repairs. Note that depreciation is a specific tax-deductible expense rather than a standalone benefit and is addressed below. Deductions become more important the higher your marginal tax rate. At a 25% marginal tax rate, a deduction of a $4000 expenditure will result in $1000 in tax savings, meaning that $4000 expenditure actually only cost the investor $3000.
Property is a depreciable asset, meaning that you can take a tax deduction for the annually depreciated value. The IRS determines the timeframe for depreciation, but currently, that timeline is 27.5 years for residential properties and 39 years for commercial. In effect, depreciation is a phantom expense in that it can be deducted as an expense, but it doesn’t actually cause negative cash flows.
Depending on specifics of your property, you may be entitled to certain capital gain benefits and deferrals through programs such as Opportunity Zones and the 1031 Exchange. Capital gains benefits are too situational to accurately discuss in this blog, so please contact our office if you have questions as to how you may qualify for certain capital gains benefits through real estate.
Contact the Law Offices of Richard Palumbo Today
With more than 100 years of combined legal experience, the attorneys at the Law Offices of Richard Palumbo have provided zealous and unmatched knowledge to Rhode Island real estate investors seeking to minimize risk while maximizing returns. Our experienced attorneys have assisted investors and businesses in all property-related needs, ranging from acquisition to disposition. Additionally, our litigators successfully pursue complex real estate litigation should the need arise. If you are interested in learning more about real estate investments in Rhode Island or are considering investing or reinvesting capital, please contact our office to set up a consultation or complete the contact form.