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Owning real estate is not just a part of the American Dream, it is an opportunity to have stable housing and a sound investment. In fact, real estate is one of the most stable assets you can own. As with many assets in the U.S., there are tax benefits designed to encourage investment in real estate. Here are some benefits to owning real estate as well as some tips on future investing.
- Mortgage Interest Deduction
One of your biggest tax breaks is reflected in the house payment you make each month. For many young homeowners, the bulk of your mortgage payment goes towards interest. This interest is deductible for both your primary residence and also your second home.
- Mortgage Points (Origination) Deduction
Homeowners who paid points (origination fees) can often deduct those on their tax returns. This deduction can be taken in the same year of the purchase or loan origination. If you refinanced your home for home improvements, those fees must be amortized and deducted over the life of the loan.
- Rental Property Deductions
Rental properties offer more tax deductions than most investments. The IRS allows you to deduct expenses for upkeep and maintenance of your property including management fees and other expenses. Here is a list of some general expenses that are deductible:
- Utilities
- Insurance
- Repairs
- Maintenance
- Association fees
- Management fees
- Travel costs incurred while doing business
- Professional and legal fees
- Depreciation
Depreciation is the loss in value of a property over time due to physical deterioration. The IRS allows an investment property owner to take a tax loss every year based on the depreciation over the useful life of the asset. For residential property, you can depreciate your property over a cost-recovery period of 27.5 years and for commercial property 39 years.
- Real Estate Tax
Property tax is a tax paid on property owned by an individual or other legal entity, such as a corporation. Most commonly, property tax is a real estate ad-valorem tax, which means it’s based on an assessed value. It is calculated by a local government where the property is located and paid by the owner of the property. The tax is usually based on the value of the improvement and the land.
- Energy Efficient Improvements
A homeowner may claim a credit for a photovoltaic system installed on a dwelling located in the United States that is owned and used as a residence. Expenditures with respect to the equipment are accounted for when the installation is completed. These include labor costs for on-site preparation, assembly or original system installation, and for piping or wiring to interconnect a system to the home. If the federal tax credit exceeds tax liability, the excess amount may be carried forward to the succeeding taxable year.
- A Tip for Re-investing in Real Estate
If you own investment property and would like to realize the appreciation of this investment without paying capital gains tax, you may want to consider a 1031 tax-deferred exchange. A 1031 exchange allows you to sell an investment property and purchase another investment property to defer the capital gains tax that you might otherwise have to pay. There are certain rules in place such as identifying your replacement property (up to 3) within 45 days from the sale of your current property and closing within 180 calendar days. Also you would want to purchase a replacement property of equal or greater value. Otherwise, the difference may be subject to tax.
