Investing in income-producing real estate has historically been a highly profitable way to grow wealth. As the article explains, real estate investing allows you to see and control your investments, with factors that can be examined beforehand, unlike many other investments. Rents and property values tend to rise with inflation, providing a hedge against its effects. Real estate also offers important tax advantages that can boost returns.The article provides a typical example of a young doctor who started with a $5,000 investment in an apartment building, and over 16 years grew that into $166,000 in equity in a $1.2 million portfolio, using only the cash generated from rentals and property sales. As Franklin D. Roosevelt noted, real estate is “about the safest investment in the world” when managed with reasonable care. The key strategies for profiting from real estate investing are: 1) staying as deeply in debt as safely possible to leverage your capital, 2) maximizing tax shields like depreciation, and 3) upgrading and selling properties when the time is right. Conservative lenders like life insurance companies are willing to provide 70-80% loans on income properties, recognizing their low foreclosure risk and high profitability.
What are the tax advantages of investing in real estate?
- Tax Deductions – Real estate investors can deduct a variety of expenses related to their investment properties, such as mortgage interest, property taxes, insurance, repairs and maintenance, travel expenses, and more. These deductions can significantly reduce an investor’s taxable income.
- Depreciation – Investors can deduct the gradual wear and tear on a rental property over its useful life, typically 27.5 years for residential properties and 39 years for commercial properties. This non-cash deduction can provide substantial tax savings.
- Capital Gains Tax Treatment – If an investment property is held for over a year before being sold, any profits are taxed at the lower long-term capital gains rate rather than ordinary income tax rates. This can result in significant tax savings compared to short-term investments.
- 1031 Exchange – This tax-deferred exchange allows investors to sell one investment property and reinvest the proceeds into a new “like-kind” property without paying capital gains taxes on the sale. This can allow investors to continually grow their real estate portfolio while deferring taxes.
- Opportunity Zones – Investing capital gains into qualified Opportunity Zone funds can allow investors to defer and reduce their capital gains tax liability, as well as potentially eliminate taxes on future appreciation.
- Passive Income and Pass-Through Deduction – Rental income from investment properties is considered passive income, which can allow investors to take advantage of the 20% pass-through deduction on qualified business income.
Overall, the tax benefits of real estate investing can be substantial and allow investors to build wealth more efficiently compared to other investment types. However, it’s important to consult a tax professional to fully understand and maximize these advantages. If you are looking for investment property fill free to contact Ilan Benshoshan real estate investment sales specialist, call 347 433 5473. or email me at crgproperties1@gmail.com
