Benjamin Franklin said it best, “In this world nothing can be said to be certain, except death and taxes.” It is an unfortunate truth that all of us will have to play the tax game for as long as we live. And that’s why we are all on the hunt for ways to find deductions and pay less of our hard earned money to taxes.
The tax code is complicated and ever evolving. Although you can lessen your tax burden, finding ways in which you can build assets and take advantage of tax benefits is a bit of a mystery for most. Traditional assets such as stocks, mutual funds, and CDs don’t provide very many opportunities for tax deductions.
One of the easiest ways that many savvy investors have found tax benefits is through real estate investing. Like there are tax advantages that come from owning your own home, there are also tax benefits through the ownership of an income property.
Tax Advantages of Owning an Income Property
Here are just a few of the deductions that can be accompanied with these types of investments:
- Depreciation (non-cash expense) deduction from income
- Mortgage interest deductions from income
- Deferral of capital gains via 1031 exchange
- Cost of repairs, maintenance, and upkeep
- Cost of services (property management & legal consultation or services)
- Travel costs associated with the property (checking on the property, inspection, repairs, etc)
When you add up all the deductions you can save, there doesn’t seem to be a better tax haven than real estate. Many real estate investors are put in a more favorable tax position. For example, Yang Guo, a San Francisco-based Data Scientist at Uber discovered this year, after filing his returns online, he could expense most of the items on the rental portion of his investment. “In the end, my rental property resulted in tax savings of 30% of my total expenses. Thirty percent off of anything is great, but 30% off something unexpected is amazing,” adds this first-time real estate investor.
The Benefits of a SDIRA & LLC
Further tax advantages can be found in the way you choose to own the income property. While you should consult a tax professional first, it may be more beneficial to own the income property through an LLC or a self-directed IRA (SDIRA), instead of in your own name.
- LLC: Owning a property within an LLC serves as a way to insulate yourself from liabilities as well as ensures that you can avoid double taxation. This potentially occurs when you use other types of corporate structures to invest in properties. Double taxation is avoided on the funds received through the collection of rent and if the property is sold later on.
- SDIRA: Using a SDIRA to a purchase property is also a great opportunity to find some additional tax savings. This process does require some extra steps, but offers you many of the same tax-deferred growth advantages you find with a regular SDIRA.
If you choose to utilize one of these additional tax advantage strategies to purchase an income property, it’s essential you do so from the start. Trying to move a property from personal ownership to an LLC or a SDIRA after closing could cause additional headaches and potentially a taxable event.
Is an Income Property Right For You?
An income property comes with many benefits, such as cash flow, appreciation, and equity growth. And not only is it a solid, tangible investment, but it’s also a chance to lessen your tax burden and keep more profit in your pocket, instead of giving it to dear, old Uncle Sam.
Learn more about the tax advantages you gain when you own an income property by calling 888-276-0232, or by scheduling a consultation when you have free time. Our Solutions Managers will answer all your questions and show you pre-vetted income properties in cash flow-proven markets nationwide.