The loudest complaint about today’s economy is the lack of precious resources to back it up. Beginning in 1878, the United States’ paper currency could be redeemed in hard silver until the practice was abolished in 1968. Today, investors are willing to monopolize on any commodity there is a demand for. Some go after energy resources, others trade in digital assets, but real estate is the most bankable.
While the housing market has its low periods, it often rebounds in a big way. Investors prefer real estate for the tax breaks made on profits from sales or rentals. Listed below are four tax incentives for investing in real estate.
Low Capital Gains
Capital gains represent the profits earned from the purchase of your real estate. Gains or losses of capital are determined by the purchase prices, adjustments, and the net yield. The lowest amount of taxes owed translates to a greater return.
Deferments on capital gain taxes can be claimed if they’re reported as installment sales. Installment rules apply when you receive one or more payments after the tax year when the sale occurred. This would classify your property sale for “long term capital gains” since you wouldn’t be taking a loss from the sale.
Depreciation
Another method of sheltering your real estate income from high taxes is through depreciation. Depreciation is implemented by the IRS to measure how an asset declines in value over a period of time. This benefits the real estate market more than any other because of the large costs.
You’ll still owe $5,000 in taxes ($2,000 in total losses) if you sell a rental property. One exception is a $25,000 deductible for any seller whose yearly income is under $100,000 and you active in maintaining the property. Another allows a write off of all passive rental losses if you, or your spouse, is a professional realtor.
1031 Exchange
There’s a good chance you’ll have to chase depreciation when selling rental property. 1031 exchanges eliminate that hustle by deferring taxes owed from a sale. Rules do apply in regards to the property’s quality and what could be done with the profits.
A 1031 applies only when a business property (i.e.: rental) is sold to exchange for a like-kind property. Like-kind assets must be of equal, or greater, value than the one sold. Taxation applies when you use profits to roll into a Real Estate Investment Trust (REIT). In other words, you cannot sell farmland to fund a shopping mall.
Live-In Flip
Houses for sale in Chicago, Miami, and New York can be costly when you pair them with your personal mortgage. It is possible to immediately move into a recently purchased property and avoid paying capital gains tax.
The “Live-In Flip” strategy guarantees tax exempt profits of $25,000 for individuals and $50,000 for couples. You’ll need to live in the property for 2 out of the next 5 years. You can do 2 or 3 more flips before moving to other investments with a healthy profit.
