What are the tax benefits of owning real estate?

Question

I was wondering what the tax benefits were of owning real estate?  I know it is agreat investment, but I wonder what all the little details were.    :mrgreen:

Account Closed · Answer

You should definitely set up a formal entity. If you are truly serious about investing in real estate, than it is inevitable. I like the LLC structure, but others like C-corps and even S-corps. If you are going to be working with partners who are contributing capital to your new business, you may want to look into a Limited Partnership. There are many options and a lot of free information out there.

If you are going to own property in which someone else lives, then you MUST incorporate. I like Nevada and even better, Wyoming, for incorporation as it keeps your information private. You can also accomplish this by use of a nominee director.

Ken Hicks · Answer

Find an accountant that DEALS WITH REAL ESTATE. I know this from past experience you can save money. I was told by my accountant that I will need  a few different entities for different ways to do REI. My advise to you will be get a list of accountants from yellowbook.com write down what your going to be doing in your business and ask for a meeting face to face to see if they area right for you. but have all your ducks in a row.

Oh and about that tax advantage for owning a home thing yeah you get a break but you need to spend 6,000 to get 1,200 back Doesn't really make alot of sense. I"m in a situation were I can pay off my primary home. Not 100% sure if that is what i'm going to do. I think that is the best Thing I can do, but I need to research it some. what if interest rates jump to 10%

N/A N/A · Answer

I believe Nevada is better than Wyoming.

N/A N/A · Answer

I am just starting my real estate investment, got a question on the tax thing you are talking about, do I have to set up a LLC to take advantage of the deductions such as office use, cell phone..etc??

Thx a lot!!!

Account Closed · Answer

There are several favorable tax advantages of owning real estate. While it isn't as good as other investment opportunities, real estate offers a nice way to shelter cashflows (depreciation) and cash spent on improvements. However, any improvements you make are depreciated over the useful life of the improvement, which is often many years.

N/A N/A · Answer

I can see both sides of this...

If 'Allcash' is saying you shouldn't buy a property just for taking the losses. You better look at cashflow. I totally agree with that.

However for most people that have a few investment properties and are working or doing something else as their main occupation. RE Investment has a lot of benefits:

1> Pre-Tax deductions of some expenses as was mentioned earlier. It gives you some of the benefits of business owner without having left your job.
2> Depreciation which get recaptured at the capital gains rate rather than your income tax rate, which is higher in most normal situations.
3> Accelerated depreciation if you segment short-life assets. Bigger deductions upfront.

Thanks.

Bill Exeter · Answer

I have to disagree with all cash regarding the statement you will eventually sell.  Investors can continue to exchange throughout their lifetime (swap until you drop) and never sell.  The strategy is to accumulate wealth with cash flow and then leave the wealth to your heirs.  Your heirs will inherit the property at a "step-up" in cost basis equal to the fair market value of the property at the date of death.

N/A N/A · Answer

I am surprised that nobody mentioned that. But if you are a landlord, you don't have to pay self-employment tax (Social Security & Medicare), which constitutes a tax saving (currently) of  15.3%. This is one of the great tax benefits of owning rental property. However, if you provide substantial services with your rental (like bed-n-breakfast, motel, hotel) you do have to pay this tax. That's the only exception to the rule.

N/A N/A · Answer

Land improvements are depreciated over 15 years straight line.  Buildings are depreciated over 27.5 years for residential and 39 years for commercial straight line.
You only have depreciation recapture on accelerated depreciation for buildings and now you can not accelerate depreciation on a building, nor land improvements.  There is not any depreciation recapture on your personal property.

Point blank - benefit for RE investment is positive cash flow and a paper tax loss.

N/A N/A · Answer

you can not depreciate land but you can depreciate land improvments such as roads, drainage etc..

I have many clients who have made substantial fortunes in the real estate business and for many years paid very little tax because of depreciation.  Yes it is true that there is a recapture on depreciation but it is at a maximum of 25% which is still less that the maximum tax rate for an indivual.

I have a CPA firm in NY that specializes in working with people in the real estate business.  I would be happy to try to answer any questions that anyone has.