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  • Nick Burgess

The Tax Benefits of Real Estate Investing

This article is for educational and entertaiment purposes only, and is not financial advice. Please contacted a licensed professional for individual help on investing or tax questions. Not a paid endorsement for any service.

 

Real estate investing can be a smart financial decision for a variety of reasons. One of the biggest advantages of investing in real estate is the potential for tax benefits. Owning and managing rental properties can provide a number of potential tax deductions and credits that can help reduce your overall tax burden and increase your overall return on investment.

a real estate contract used in real estate investing

Before we dive into the specific tax benefits of real estate investing, it's important to understand that tax laws are complex and constantly changing. It's always a good idea to consult with a tax professional or accountant to get a better understanding of how these laws apply to your individual circumstances.


With that being said, let's take a look at some of the key tax benefits of real estate investing:


1. Mortgage Interest Deductions

If you own a rental property (or you're one of those TikTok Gen Z pieces of shit who owns like 9 apartment blocks), then you're likely paying a mortgage to finance your purchase. And let's be real, who doesn't love paying a mortgage? Oh wait, nobody. But at least you can deduct the interest you pay on your mortgage from your taxable income. This can be a significant deduction, especially in the early years of your mortgage when the majority of your payment is going towards interest. And who knows, maybe one day you'll even pay off that mortgage.

2. Property Taxes

In addition to mortgage interest, you can also deduct property taxes you pay on your rental property. This can help reduce your overall tax burden and increase your cash flow. And who doesn't love having more cash flow? (Unless it's going towards property taxes, in which case, yuck.)


3. Depreciation

When you own rental property, you can take advantage of a tax deduction known as depreciation. Dropshippers will use the concept of "depreciation" to purchase a Mercedes G-Wagon under Section 179 of the U.S Tax Code, but that's not really what this is.

Actual depreciation allows you to gradually write off the cost of your property over time. This can be a significant tax benefit, especially for properties that have a long useful life. Like, say, a castle made of solid gold. (Okay, maybe not that long of a useful life.)


4. Expense Deductions

In addition to the deductions listed above, there are a number of other expenses that you can deduct when you own rental property. These may include repairs and maintenance, insurance, property management fees, and more nonsense that you, as a homeowner, are forced to incur.

Keep good records of these expenses and consult with a tax professional to make sure you are taking advantage of all available deductions. Or just throw all your receipts in a shoebox and hope for the best. (We don't recommend this option.)


5. 1031 Exchanges

A 1031 exchange, also known as a like-kind exchange, allows you to sell a rental property and reinvest the proceeds into a new property without incurring capital gains taxes. This can be a powerful tool for real estate investors looking to grow their portfolio without being hit with a large tax bill. And let's be honest, who doesn't love the idea of growing their portfolio without having to pay extra taxes?


6. Passive Activity Losses

If you own rental property, you may be eligible to claim passive activity losses on your tax return. Passive activity losses are losses that are incurred from a business or investment activity in which you do not materially participate. These losses can be used to offset income from other sources, reducing your overall tax burden. In other words, if you're not making much money from your rental property, you can use those losses to offset income from other sources. Like, say, your day job. (Because let's face it, most of us still need one of those.)

As you can see, there are a number of tax benefits to real estate investing. These benefits can help reduce your overall tax burden and increase your return on investment. It's important to remember, however, that tax laws are complex and constantly changing, so it's always a good idea to consult with a tax professional or accountant to get a better understanding of how these laws apply to your individual circumstances.

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