If you’re considering investing in real estate, you may be interested in the abundant potential for tax benefits. In the following post, Ron Cadman discusses the various tax advantages to real estate investment. Ron Cadman is a real estate investor and co-founder of multiple real estate investment firms, including Investar USA, based in Phoenix, Arizona.
One of the many benefits of real estate investment is the potential for tax breaks. While the Tax Cuts and Jobs Act has been somewhat controversial, it offers abundant opportunities for real estate investors to reduce their federal tax burden. While the language of the legislation is complex and may be confusing, it is nonetheless worth investigating, particularly for real estate investors in states where the cost of living is high, like New York and California.
Here are a few ways real estate investors can reduce their tax obligations. (Please bear in mind that some tax advantages are specific to real estate investors. House flipping strategies may not qualify you for tax benefits in some cases.)
Bonus depreciation shelters. Depreciation in real estate can mean a paper reduction in value that is credited as an expense. So, if your real estate property value declined, without your having spent any money, your taxable income from rentals is reduced. The first year, the Tax Cuts and Jobs Act allows for a 100 percent depreciation deduction, after which the reduction will decrease by 20 percent until the bonus expires in 2022.
- Rental income isn’t subject to Federal Insurance Contributions Act (FICA) taxes. If you are self-employed or considering self-employment, your FICA obligation may be discouraging. Self-employment comes with a 15.3 percent FICA obligation. However, rental income isn’t subject to FICA taxes.
- Reside in your rental investment. If your rental property is your principal residence, you fall into a capital gains tax exemption bracket. This strategy is known as the Live-In Flip.
IRA tax minimization. If your IRA custodian permits it – and some don’t – you may be allowed to invest in a loan against your real estate property. Check which investments are approved by your IRA custodian.
The new tax incentive laws have altered many of the previous rules, so it’s important to do your research if you want to reduce next year’s tax bill. However, the real estate investment lifestyle isn’t for everyone, and it’s not a fool-proof strategy. Consult with real estate investment professionals and tax attorneys before you commit to an investment.
Ron Cadman is a 30-year veteran of the real estate investment profession, having co-founded multiple real estate groups in the United States and Canada. His investment funds have contained several hundred single and multi-family rental properties.