Tax Advantages in real estate

[Max Briggs]

I hear people often say that real estate is treated more advantageously from a tax perspective than other businesses.  I frequently hear people say something along the lines of "I get 15% rate of return, and that's not even considering my tax deduction so I know I'm making a killing".  However, I don't see how real estate is treated any differently than other businesses.  In business, profits are taxed, not income.  My profit on a rental property is my income (rent) minus my expenses (Interest on my debt, insurance, repairs, etc.) and that is precisely what I am taxed on and I am taxed at the same rate as every other business.  Some people might argue that depreciation on the house is a great benefit, but I don't see that either.  Although I do not have to repair my roof every year, I have to save money for that expense every year, so I don't really consider that profit, so the IRS allows me to deduct some amount of money for that, great.  Except that it goes against my cost basis and I get taxed on it when I sell the house.  I'm not saying that it's unfair, but I certainly don't see why people consider it to be a bigger tax benefit that any other business.  Am I missing something?

[Paul Allen]

Originally posted by @Max Briggs:

I’m no too sure I buy that not paying self employment tax is a big benefit.

Dave is single and has a home business building furniture. After taking all his expenses and exemptions into consideration, Dave has $50,000 of taxable income. Using 2016 rates, Dave will owe the IRS $15,731 in taxes for that $50,000 of taxable income.

Debbie is single and owns residential rental properties. After taking all her expenses and exemptions into consideration, Debbie also has $50,000 of taxable income. Using 2016 rates, Debbie will owe the IRS $8,271 in taxes for her $50,000 of taxable income.

As for depreciation recapture, if you die owning the property, you never have to repay it. My father-in-law- is 80 and owns 12 properties. He has depreciated them for about $1.5 million. That equates to $1.5 million of tax free income to him over his lifetime. His heirs will sell the properties for about $4 million and pay no income taxes on that money.

These meet most people's threshold for a "big" tax benefit. Your personal threshold might be higher.