Real Estate and Taxes

What are the tax implications of real estate investments?

First off, we have to CYA for a moment: The tax implications of real estate investments can be significant and can vary depending on the type of investment, your tax bracket, and other factors. Never assume you know what the tax implications of your investments are by reading a couple of articles on the internet. The US tax code is a living, changing (and to be honest, for most people, dry and boring) document. That’s why we pay tax professionals who actually enjoy figuring out the tax code (kind of like a puzzle) to read it for us. Get yourself a good accountant who can talk you through how your investments will affect your tax bill, and how you can minimize your tax liability when making large investments.

 

All that being said, we hope this guide will get you started in understanding some of the more common tax implications, so that when you are talking to your accountant, you aren’t feeling completely overwhelmed.

 

Capital gains tax: 

When you sell a property for more than you paid for it, you may be subject to capital gains tax on the profit you made. Capital in this case means money that you are investing, and gains… well that means you have more of it than you did before!

 

Depreciation: 

Depreciation is the reduction in value of something, typically linked to the passage of time. Basically, it’s a fancy word for “wear and tear” making your investment less valuable. Although this sounds like a “bad word” depreciation can to an extent, work to your advantage. Real estate investments, especially rental properties, can be depreciated over time for tax purposes, which can lower your taxable income.

 

Mortgage interest deduction: 

This one is pretty much exactly what it sounds like. If you have a mortgage on a rental property, you may be able to deduct the interest paid on that mortgage from your taxable income. See your accountant for more details on whether this applies to you. 

 

Passive income: 

That’s what we’re all here for, right?!? Passive income is any money that you take in that doesn't come from your 9-5. Rental income is considered passive income and may be taxed differently than your earned income (the paycheck you get from your boss at that pesky 9-5).

 

1031 exchanges: 

Remember above when we said that the US tax code was a living, changing, and possibly confusing document? This is one of the major parts of that code that affects people who own properties. The cliff’s notes version is that if you sell a property, and then use the proceeds to buy another property, you may be able to defer paying capital gains tax through a 1031 exchange.