This ARTICLE Is About The Tax Benefits of Investing in Real Estate Properties
The Tax Benefits of Investing in Real Estate Properties Can Save Thousands Of Dollars In Paying Federal Income Taxes For Many Years: Real estate investors can save tens of thousands of dollars in taxes. There are countless writeoffs and unreimbursed expenses real estate investors can take advantage of. Besides depreciation, real estate investors can write off any expenses related to running their real estate portfolio. The housing market is hot and real estate values are skyrocketing. With the resurgence of non-QM and alternative financing programs with non-owner occupant homes, more and more people are becoming real estate investors. A large percentage of our clients at Gustan Cho Associates are real estate investors. Gustan Cho Associates is adding more and more non-QM and alternative mortgage loan programs that benefit real estate investors. Many real estate investors who lost everything during the 2008 real estate and credit meltdown are coming back to become real estate investors again. In this article, we will discuss and cover the tax benefits of investing in real estate in 2021.
The Tax Benefits In Investing In Real Estate For Investors
When you start looking at real estate past the shared goal of homeownership, you’ll notice that there are numerous tax benefits. Investing in real estate isn’t for everyone. However, many people are noticing the skyrocketing real estate values throughout the United States. Other potential real estate investors have been waiting for a housing correction. However, there is no housing correction or not even close. When the coronavirus outbreak hit the United States in February 2020, many saw this as an opportunity where real estate prices would drop and there would be a real estate market correction. NOPE. Home prices skyrocketed even more. Many people may see the work involved and run the other way. But the payoff when you’re looking at the big picture is worth it! The launch of dozens of non-QM and alternative loan programs has made the hot housing market even hotter. Most homes are selling above list price.
In this article, we will discuss and cover The Tax Benefits of Investing in Real Estate.
The Tax Benefits of Investing in Real Estate On Landlord Deductions
Buying rental properties is where many people start investing in real estate. Rental properties are a great way to build your real estate portfolio, and they can generate long-term, mostly passive, income.
Landlords can deduct depreciation, mortgage interest, cost of repairs or maintenance on top of the property tax deductions. But these obvious tax benefits are small compared to the benefits of deferral of capital gains, and day-to-day business costs.
As a landlord, you can deduct travel costs and even utilities that you cover for your tenants. This benefit is huge in states that require the landlord to include gas, water, and trash!
The Tax Benefits of Investing in Real Estate On Capital Gains
You may have heard a lot about deferring capital gains as a tax benefit. But why does the term “capital gains” send property investors into nervous messes? Capital gains are the term that describes how the IRS associates the sale of a property and your net worth.
Every time you sell a home, the IRS believes that your capital gained anywhere from 1 to 15% which is unreasonable at best. Fix and flip loans and investors that use these types of loans have the most to lose with capital gains because they’re buying and selling property often.
But there are tax benefits that make this scary real estate term means nothing at all.
The Truth behind the Deferral of Capital Gains section 1031
The IRS allows real estate investors a tax benefit for buying and selling properties. Section 1031 is a tax benefit exclusive to property investors for “like-kind” investments. Most of the time any real estate property is “like-kind” to any other property regardless of quality, size, or condition.
There are some restrictions however any property investor whether they are an individual, S-class, or c-class corporation is eligible to apply for a Capital Gains Deferral section 1031 tax benefit.
Property Investing as a Profession
When you’re a real estate investor, you are missing out on opportunities that come with regular employment. But have no fear because you can register your investment company as an LLC and use an SDIRA to secure extra tax benefits.
An LLC (limited liability company) will help protect your assets from the legal attack in the worst situations and is a good move in general. Registering as an LLC will also open up a new wave of possible tax benefits.
An SDIRA is a self-directed individual retirement account. As a real estate investor, you can use this in place of a traditional employer-offered 401K.
What Professional Real Estate Investors Are Advising
Gustan Cho has been a professional real estate investor for decades before entering the mortgage lending industry and creating Gustan Cho Associates. Gustan Cho has owned and managed over 3,000 residential units. His portfolio comprised 7 large apartment complexes. Each apartment complex community had over 400 residential units and over 10,000 residents. Like many large real estate investors, Gustan Cho Associates has lost over $100 million dollars during the 2008 financial crisis. To this day, Gustan advises countless real estate investors. Gustan says he believes it is always a good time to invest in real estate. However, try to stay away from high-taxed states like New York and Illinois. He thinks the resurgence of asset-based lending, bank statement mortgages, and other unique non-QM lending programs is key for real estate investors.
The Key In Investing In Real Estate
According to Gustan Cho, location is key when investing in real estate. Make sure that the city, county, and state are led by competent politicians. Illinois has one of the most incompetent governors (JB Pritzker) and mayors (Lori Lightfoot) running government. The only solution incompetent politicians know is ruining people’s lives by increasing taxes, spending taxpayer’s money as it grows on trees, and causing taxpayers and businesses to flee the state to other lower-taxed states with affordable cost of living. Ideal places of investing are states with pro-business politicians, low taxes, low cost of living, and encouraging in-migration by offering incentives like tax breaks and low taxes. The 2008 real estate meltdown was a one-off incident of a lifetime. Gustan believes real estate is still the safest investment and investors could not go wrong. Real estate prices are very high. There is no doubt there will be a market correction. However, the housing market can keep on going up without a correction. Nobody has a crystal ball. There is no way of trying to time the lowest point in real estate to start investing.
