Is Real Estate Really the Best Tax Strategy?
Summary
This article from BiggerPockets discusses the tax advantages of real estate investing, which can significantly boost your after-tax returns. Hosts should pay close attention to depreciation, deductible expenses, and leverage, as these can help minimize your tax burden and maximize profitability. Consider consulting with a tax professional to optimize your real estate tax strategy.
Key Insights
- •Many landlords qualify for the Section 199A qualified business income deduction, which allows you to deduct up to 20% of your rental income.
- •Depreciation allows investors to deduct a portion of the property’s value each year, even if the property is gaining value; residential properties depreciate over 27.5 years, and commercial properties over 39 years.
- •Investors can deduct a wide range of expenses related to operating and maintaining their rentals, including mortgage interest, property taxes, insurance, repairs and maintenance, property management fees, and utilities.
Action Items
- ✓Track home improvements, closing costs, and contractor invoices to increase your property’s basis and reduce future capital gains.Effort: mediumImpact: medium
- ✓Consider the tax implications of repairs vs. improvements; repairs are immediately deductible, while improvements must be depreciated.Effort: lowImpact: medium
Tools & Resources
- →Range: The article mentions Range as a tool to help with tax planning.
Watch Out For
- ⚠A common mistake is poor documentation and missing basis adjustments, which can lead to higher taxes when selling.
- ⚠Misclassifying repairs vs. improvements can lead to incorrect deductions or IRS scrutiny.
- ⚠Misunderstanding passive loss rules can result in assuming all losses are deductible against wages or business income, or missing out on passive loss carryforwards.
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