You can get many tax benefits of real estate investment by owning an investment property. Investors dealing in real estate get the maximum tax benefits in the name of deductions. Deductions that are accounted for can be depreciation, property tax, repairs or any other form of expenses. Tax benefits of real estate investment are many, and these breaks in taxes are helpful to a lot of people dealing with real estate as their full time business.

5 Important Tax Benefits of Real Estate Investment

If you are planning on increasing your wealth, the best investment to deal in is the real estate. The important benefits of investing in real estate are increase in property value due to appreciation, good cash flow in the form of rental income and some incredible tax benefits. Following are the 5 important tax benefits of real estate investment.

Capital gains are the profits you make when you sell a property. One of the tax benefits of real estate investment are there are lower taxation rates on your capital gains. The gains that investors get from selling their real estate investment property are termed as capital gains which are of two types as mentioned below. Low tax rates on capital gains are an advantage if you build your long-term investment strategy around strategically sell real estate for growth or living expenses. Generally in all tax brackets capital gains taxes are considered better than the equivalent income tax on your ordinary income.

  • Short-Term Gains: The gains that are received from investment properties which are held for less than one year are called short-term gains. Investors have to pay tax according to the bracket under which they fall. There is no special tax benefit in real estate for short term capital gains.
  • Long-Term Gains: The gains that are received from investment properties which are held for more than one year are termed as long-term capital gains. The tax rate is lower in the long term capital gains because of which investors prefer the latter over the former. The long term capital gains tax are either 0%, 15%, or 20%, depending on what income tax bracket you are in.

Depreciation

Like any other asset residential real estate is also an asset that breaks down over time. Depreciation is a deduction taken on materials that breaks down. The IRS uses depreciation to acknowledge that an asset wears down over time. It is like an allowance given for exhaustion or wear and tear of the property, including a reasonable benefit for obsolescence. Depreciation is charged in different years for the residential and commercial property. For residential properties, it is calculated in 27.5 years, and for commercial, the same is 39 years.

It is an incredible benefit given by IRS to real estate investors. Even though anything that breaks down on the property we are able to deduct it, we all know that property values generally go up over time. Therefore, depreciation on real estate is often known as a “phantom deduction” because although we deduct the cost, the actual loss never really occurs.

Depreciation is charged by the method named as (MACRS) Modified Accelerated Cost Recovery Method. In MACRS the residential rental property and structural improvements are depreciated over 27.5 years, while appliances and other fixtures are depreciated over 15 years. Whatever is the cost of your residential property (excluding cost of the land), it will be spread out over 27.5 years…