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Real Estate Investing Tax Strategies

By Andrew J. Dehan,


When you're starting with any investment, it's always good to be aware of the tax implications . This is especially true when investing in real estate. Because the government wants to encourage real estate investment, there are several real estate investing tax strategies that investors can take advantage of. Let's go over five of the major tax strategies and how you can make them work for you.

A financial advisor can help you optimize a tax strategy for your real estate investments and goals.

5 Real Estate Investing Tax Strategies 1.) Minimize or Avoid Capital Gains Tax

When it comes to tax on capital gains , there are two ways they're taxed: long-term and short-term capital gains. Short-term capital gains are applied to any asset you've bought and sold for a profit within a year. They're taxed at the same rate as income tax. Long-term capital gains taxes are much lower, but you'll need to hold the property for over a year.

One way to avoid capital gains tax on real estate is to make the property your primary residence. Through using a Section 121 Exclusion , you can sell your primary residence and not pay capital gains tax on a gain of up to $250,000 (or $500,000 if you're married and filing jointly). To claim the property as a primary residence, you must live there for 24 of the previous 60 months.

2.) Take Advantage of Deductions

There are many tax deductions you can make on the real estate you own. While can deduct your mortgage interest on your home, it's especially true when we're talking investments beyond your residence. Here are some examples of what you can deduct on your taxes as a real estate investor:

  • Property taxes and insurance
  • Cost of maintenance
  • Property management costs (if you use a property management company)
  • Advertising costs to get new tenants
  • Legal and accounting fees
  • Business expenses such as software, computers and other tools and resources
3.) Deduct for Depreciation

Accounting for depreciation is another real estate investing tax strategy. Properties don't always appreciate in value, and if they dip in their worth, you can use them to deduct the loss on your taxes. This deduction will lower your total taxable income, reducing the amount you pay. Note that if you take a deduction for depreciation, the IRS will take note of it.

If you sell the property and make a profit on it, you will need to report it to the IRS as depreciation recapture. The IRS will charge you an extra tax on this gain to make up for the depreciation you deducted.

4.) Defer Tax with Tax Incentives

There are a couple ways you can defer your taxes on real estate. The government uses these two programs to encourage investment:

  • 1031 Exchange: Allows you to sell your property at a profit and defer paying capital gains as long as you reinvest in a similar kind of property within 180 days.
  • Qualified Opportunity Zone Funds: An investor can sell his or her property and defer capital gains by investing the profit into a qualified opportunity zone fund within 180 days. These funds are used to develop economic activity in distressed communities around the country.
5.) Borrow Against Your Equity

You may be tempted to sell the property when you need to liquidate. But, if you need to fund a new investment or free up some cash, think about dipping into your equity. A cash-out refinance will give you a new mortgage on the property in exchange for cash.

This can be a better option than selling because you won't have to pay capital gains tax. Yes, you'll have a mortgage payment with interest, but you could pay less than you would with capital gains. Long-term capital gains tax runs 0% – 20%, depending on the gain you receive. At time or writing, 30-year fixed-rate mortgages on residential real estate are hovering around 6.25% – 6.5% interest.

The Bottom Line

Part of having a successful real estate investing business is employing real estate investing tax strategies. From maximizing deductions to using incentive programs to defer taxes, there are several things you can do to cut your tax bill . A big part of being able to take full advantage of these tax strategies is knowing they exist. That's where a financial advisor and an accountant that specialize in real estate can be major assets.

Real Estate Investment Tips
  • A financial advisor can help you figure out how to invest in real estate effectively. Finding a qualified financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
  • Real estate investment trusts, also known as REITs, are purpose-built for people who want to invest in real estate without buying property. There are three main types, and each has its own pros and cons.

Photo credit: ©,© Boonchu, © AungTun

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