If you’re like many modern entrepreneurs, then the chances are excellent that you got into real estate investment at least in part because of the financial benefits and with good reason. Real estate is one of the most solid investments a person can make toward their future. It comes attached to a variety of tax benefits and incentives as well.
However, knowing that real estate investment is a great choice tax-wise and having a thorough understanding of all of the tax benefits of owning investment real estate are two different matters. Let’s take a closer look at the details, the better to help you understand how much your investments might really be worth come tax time.
What Is Depreciation and Why Is It Important?
There are lots of different options available to the savvy investor when it comes to real estate these days. You can invest in vacant land or fixer-upper houses and apply your ingenuity to improvements. You can also purchase a rental property or a commercial building and manage it to the tune of reliable future income. All of these investments offer huge tax incentives to investment-minded individuals.
Most experts feel that of the many benefits of owning investment real estate, the best one of all is the tax deduction known as depreciation. Depreciation can best be described as a “paper loss” accounting for accumulated obsolescence, as well as wear and tear. The IRS requires all real estate investors to apply this concept to their properties. (However, it’s important to understand that land itself if not depreciable.) On a straight-line basis, commercial property is depreciated over the course of 39 years while residential income property depreciates over an average period of 27.5.
What Are the Other Tax Benefits of Owning Investment Real Estate?
If you spend a bare minimum of 750 hours per year – about half of the average person’s working hours — on real estate-related activities, you will also be able to qualify as a real estate professional. If you qualify as a real estate investor and are also considered to be someone that “materially participates” in the management of your properties, you can potentially be allowed unlimited deductions as related to your property. It’s possible to qualify as a material participant even if you also enlist the aid of property management professionals to help you with your investments. Additional deduction benefits include:
First Year Deductions: In many cases, a first-year real estate investor can deduct up to 100% of the value of up to $100,000 worth of business equipment purchased in the interests of improving or managing property. However, you’ll want to speak with your tax accountant in order to make sure that all of your claims hold water before including them on your tax return.
Personal Property Deductions: Any personal property – such as appliances, automobiles, HVAC equipment, light fixtures, and other such items – used in your investments will also depreciate, albeit over shorter periods than the property itself. That process can add up to additional tax benefits.
Repair Work and Upgrades: Any work, repairs, or business expenses necessary to maintain your properties and keep them in good condition are also potentially tax deductible. The same goes for any equipment or supplies you need to buy to fulfill this purpose.
At the end of the day, real estate is a lot more than just a great investment in your own future that you can expect to grow in value over time. As touched on above, it can mean a variety of breaks come tax time as well. Ask you tax consultant for more information in regards to your investments today!