Tax Benefits of Owning Rental Real Estate: Part One

Taxes are one of the only certainties in life. Whether we like or not, we’ve all got to pay our dues to Uncle Sam. However, there are ways to save yourself some money through tax advantages, and many of these are available to you when you invest in real estate for rental purposes. In fact, this strategy offers benefits unlike many other common investments, such as stocks or mutual funds. In this two-part post, I’ll cover some of the biggest tax advantages you’ll discover - and love - when you decide to invest in rental real estate:

Deductions

If you own a rental property, you can deduct tons of expenses associated with your property. Some of these include the interest you pay on the mortgage (if you used financing), cost of repairs on the property, utilities, and even the office equipment you use at home to manage the property. Basically, anything that you use to maintain/manage the property is a deductible expense. Now, this may not seem like too big of a deal, considering you wouldn’t have those expenses if you didn’t own the property in the first place, but all of this adds up for even more savings on top the monthly cash flow you’re (hopefully) pulling in.

Ownership Options

The way you own your property can also result in tax benefits. Many investors choose to purchase their rental properties through an LLC or self-directed IRA. While there are a variety of reasons for opting to do this, one of the biggest is the tax advantages that come with these types of ownership. Utilizing an LLC allows you to avoid double taxation on a property, while an SDIRA offers up some sweet tax-deferred growth advantages. You won’t see either of these benefits if you choose to purchase the property in your own name.

Long Term Capital Gains

Capital gains refers to the money you make when you sell a property, and there are two types: short and long term. Short term gains are made when a property is sold within a year of purchase, while long term gains occur with properties sold after more than a year of ownership. With a rental property, you’ll most likely see long term capital gains, and this is what you’ll be taxed on when you do decide to sell said property.

The big benefit here comes in the form of the drastically reduced tax rate that you’re required to pay the feds after the property is sold. The IRS has set lower tax rates for income derived from long term capital gains, and the percentage you pay depends on the tax bracket you fall into. For instance, a married couple filing jointly in the 10% or 15% brackets will pay nothing in long term capital gains tax, while those in the highest tax bracket (39.6%) will pay just 20% on capital gains. If this isn’t making sense, it’s okay. Taxes are confusing. Just know this: you’re saving a boatload of cash, and oddly enough, you can thank the IRS for that.

In the next post, we’ll cover a few more of the amazing tax benefits that come with owning rental property. Until then, happy hunting on your real estate investment!