Legacy Prime Lending - Resources , Investment

7 Tax Benefits of Real Estate Investing

Mon, 03 Oct 2022 13:05:14 -0500

You know that diversifying your investments is a smart move. Plus, you’ve heard that buying rental properties can produce a valuable, recurring cash flow from a mostly passive income. But are you aware that it can also make your financial picture rosier come tax time?

Read on to learn about the many tax benefits of real estate investing and how you can maximize savings on your yearly return.

1. Use Real Estate Tax Write-Offs

One of the biggest financial perks of this income stream is the real estate investment tax deductions you’re able to take. You get to deduct expenses directly tied to the operation, management and maintenance of the property, such as:

Property taxes
Property insurance
Mortgage interest
Property management fees
Cost to maintain and repair the building

But did you know that you can also write off much of what you pay to run your real estate investment business? Qualified business expenses may include, but aren’t limited to:

Advertising
Office space
Business equipment (e.g., computer, stationery, business cards, etc.)
Legal and accounting fees
Travel

All of these deductions lessen your taxable income, which could save you money when you pay taxes. Let’s say your rental income is $25,000, and your related, qualified expenses come to $8,000. That means the taxable income from your real estate business is $17,000.

Pro tip: Be sure to keep detailed, accurate records and receipts so you can prove the expenses you claimed in case you’re audited by the Internal Revenue Service (IRS).

2. Depreciate Costs Over Time

Depreciation is the incremental loss of an asset’s value, generally due to assumed wear and tear. As a real estate investor that holds income-producing rental property, you can deduct depreciation as an expense on your taxes. That means you’ll lower your taxable income and possibly reduce your tax liability.

You’re allowed to take the depreciation deduction for the entire expected life of a property (currently set by the IRS as 27.5 years for residential properties and 39 years for commercial properties).

For instance, maybe you purchase a home you intend to rent out. The value of the building itself (excluding the land it sits on) is $300,000. If you divide that value by the 27.5 year expected life of the dwelling, you can deduct $10,909 in depreciation each year.

Once you sell, though, be prepared to pay the standard income tax rate on the depreciation you’ve claimed. This requirement is known as depreciation recapture, which you can avoid if you pursue other tax strategies, like a 1031 exchange (more on that below).

Pro tip: Ask your accountant about depreciating major improvements you’ve made to your investment properties, such as installing a new roof.

3. Use A Pass-Through Deduction

A pass-through deduction allows you to deduct up to 20% of your qualified business income (QBI) on your personal taxes. When you own rental property as a sole proprietor, via a partnership, or through an LLC or S Corp (known as pass-through entities), the money you collect in rent is considered QBI by real estate tax law.

For example, if you have an LLC that owns an apartment complex, you could receive $30,000 in rental income every year. By using a pass-through deduction, you can write off up to $6,000 on your personal return. Of course, some rules and regulations must be followed, so please consult with your accountant.

Please note: This perk, along with other provisions in the Tax Cut and Jobs Act of 2017, is currently set to expire in 2025.

4. Take Advantage Of Capital Gains

A capital gains tax may be assessed when you sell an asset, like a piece of property, for a profit. There are two types to be aware of: short-term and long-term. They each impact your tax situation differently.

Short-Term Capital Gains

When you profit from selling an asset within a year of owning it, you realize a short-term capital gain. While you may not have a choice but to sell, be aware that doing so can have a negative effect on your taxes. That’s because the gain gets counted as ordinary income.

So, if you earn $100,000 from your day job and sell an investment property for a $100,000 profit, your income essentially doubles for tax purposes. If you file single, that extra income puts you in the next tax bracket (as of 2020), which potentially means a larger tax bill than you expected.

Long-Term Capital Gains

On the other hand, you see a long-term capital gain if you profit from the sale of an asset that you’ve held for a year or longer. If you can wait until the anniversary of your purchase to sell, you’ll get to keep more money in your pocket. That’s because long-term capital gains have a significantly lower tax rate than your standard income.

And, if your income is low enough, you may not have to pay the tax at all. Suppose you and your spouse make a combined $75,000 per year and file a joint tax return. The long-term capital gains are tax-free since the tax rate for your income level is 0%. That means you can keep every cent of the profit you get when selling a property.

5. 1031 Exchange

1031 exchanges exist because the government wants to reward people who reinvest their real estate profits into new deals. As long as the new property you buy is of equal or greater value than the one you sell, the program lets you swap them for tax purposes. That means you can defer paying the capital gains tax on the sale of the first property.

You can use 1031 exchanges indefinitely. But, when you want to cash out your profits, you’ll have to pay any tax owed. There are a few different forms of the program available based on the timing of your purchase and sale transactions. Since the program can be complicated to navigate and take full advantage of, it’s wise to consult with a qualified financial professional.

6. Opportunity Zones

Designated by the US Department of Treasury, opportunity zones are low-income or disadvantaged tracts of land. The 2017 Tax Cuts and Jobs Act encourages investors to put their money into developing and economically stimulating these communities by offering tax breaks.

Alongside other real estate investors, you place your unrealized capital gains into a Qualified Opportunity Fund. Money from that fund goes toward improving the selected area.

If you play by the rules of the program, you can enjoy the following tax advantages:

Defer paying capital gains until 2026 (or until you sell your stake in the fund).
Grow your capital gains by 10% if you hold the fund for 5 years; 15% for 7 years.
Avoid paying capital gains entirely if you remain invested in the fund for 10+ years.

7. Business Tax Benefits

When you’re self-employed, you generally need to pay both the employer and employee portion of the FICA tax (covering Social Security and Medicare). However, if you own rental property, the money you receive isn’t classified as earned income. That means you’re eligible for one of the least talked about real estate tax breaks: avoiding the FICA tax, also known as the payroll tax.

Here’s the math in action:

Let’s pretend you own a freelance writing business that generates $50,000 in revenue. Since that money is considered earned income, you’re on the hook for the payroll tax. At a 15.3% tax rate, you’d have to fork over $7,650. But, if you’re a rental property owner instead, you would get to keep that cash in the bank.

Take Advantage of Your Tax Benefits

There are a lot reasons to invest in real estate, and tax benefits are just one. If you're considering real estate as an investment, get preapproved first. This will help you be prepared to make a great purchase.

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10 Reasons and Benefits to Invest in Real Estate

Mon, 03 Oct 2022 12:55:39 -0500

Real Estate is arguably the best investment in the world. Income. Equity. Tax breaks. A hedge against inflation. The benefits that come with investing in real estate are enormous.

There can be some risk associated with investing in real estate, though. It's important to understand markets and how to choose properties that are going to grow in value over time. They don't always pay off, and if you invest poorly, you can lose money.

However, if you understand the risks, do your research and evaluate the benefits in detail, in can provide a nice source of income. Here are some of the biggest benefits and potential risks that come with it.

What is Real Estate Investing?

There are many ways to invest in real estate. You can buy a sing-family home, rent it to someone, and collect the monthly rent check. This can give you a nice source of income and also allow you to wait for the property value to rise. When it does, you can sell, making a profit, or you can cash-out the equity to purchase more real estate or make improvements. You can also buy commercial real estate and rent it to businesses.

If you want to leverage more time and money, you can invest in apartments, allowing you to multiply your profits.

The biggest thing is to research what type of real estate investing is the best fit for you.

REITs

Buying into REITs , short for real estate investment trusts, is one of the easiest ways to invest in real estate. Why? With a REIT, you invest in real estate without having to worry about maintaining or managing any physical buildings.

REITs are companies that own real estate, anything from retail properties to apartment buildings, hotels, offices or warehouses. When you buy into a REIT, you purchase a share of these properties. It's a bit like investing in a mutual fund, only instead of stocks, a REIT deals with real estate.

You can earn money from a REIT in two ways: First, REITs make regular dividend payments to investors. Secondly, if the value of the REIT increases, you can sell your investment for a profit.

You can invest in a REIT just as you would invest in a stock: REITs are listed on the major stock exchanges. The National Association of Real Estate Investment Trusts says that about 145 million U.S. residents are invested in REITs.

Residential Properties

Sinking your money into investment properties can also prove lucrative, though it does require some work. First you buy a residential property, either a single-family or multifamily building, and purchase it, usually financing this purchase with a mortgage loan.

You can then either live in the property or rent it out as you wait for it to appreciate in value. If you rent out the property, you might be able to use these monthly checks to cover all or part of your monthly mortgage payment. Once the property has appreciated enough in value, you can sell it for a big payday.

The challenge, of course, is that the property you purchase isn’t guaranteed to increase in value. You can lower the odds of a bad investment by researching local neighborhoods to find those in which home values tend to rise. You should also work with real estate agents and other professionals who can you show historic appreciation numbers for the communities you are targeting.

You will have to be mindful of location. A home on a busy street might be more affordable but might not appreciate as quickly as one located on a quiet side street. An apartment building located next to public transportation might see a quicker jump in value than one located miles away from the nearest commuter train station.

If you don’t want to take phone calls late at night from tenants complaining about furnaces that aren’t working or roofs that are leaking, you’ll have to pay a property management service. These services handle the daily work of maintaining and operating properties. They’ll also send repair technicians to properties that need emergency maintenance.

Commercial Properties

You can earn money by buying and investing in commercial properties much the same way you do by investing in residential real estate: First you buy your property. Then you charge monthly rents to tenants. If the property’s value rises, you can sell the commercial space for a hefty profit.

There are many types of commercial properties in which you can invest. You can purchase an office building and charge companies to rent space in that building. You can purchase strip centers or other retail properties and charge monthly rent to business owners. You can even purchase a warehouse and charge rent to manufacturing companies or retailers who need to store their products.

The risks are the same as they are when investing in residential real estate: There is never a guarantee that your commercial properties will increase in value, which is why researching the properties and the communities in which they sit is so important. You might also struggle to find enough tenants to fill that office building or retail center you purchased.

House Flipping

Investors who want to make money quickly often turn to house flipping. This is when you purchase a home for a lower price, renovate it quickly and then sell it for a fast profit. The key, of course, is to buy the right home. You’re not interested in monthly rents when flipping a home. Instead, you need to purchase a home for the lowest possible price if you want to make a good profit when selling.

Again, research is key. You want to find a home in an attractive neighborhood, one that attracts plenty of buyers. And you need to make sure the repairs required for the home aren’t so costly that they’ll swallow any potential profit.

If you’re handy enough to handle renovations on your own, you’ll greatly improve your chances of making solid profits through house flipping.

10 Reasons To Invest In Real Estate

Investing in real estate, like any investment, includes some risk, but it can provide a lot of cash to your bank account. Here are some benefits of investing in real estate.

DISCLAIMER: Nothin is guaranteed in real estate investing. You must do your own research.

1. Cash Flow

Real estate investing is a great way to raise your income. Whether your purchase residential real estate or commercial real estate, you can rent to tenants, producing passive income. You'll receive recurring checks from the renters in the form of checks. Remember to check payment history prior to renting to a tenant, though.

2. Profitable Returns

As real estate appreciates over time, you can sell it for a profit. You can also cash out equity to use in additional home purchases. As a reminder, appreciation is never guaranteed, though.

3. Hedge Against Inflation

Even if inflation is on the rise, and the dollar is losing value, often real estate continues to raise in price, allowing your money to stay safe from depreciation. In high-inflation markets, real estate can be a phenomenal tool. When prices or goods and services are rising, most of the time, real estate prices and rents do too. Therefore, even while you're paying more for normal living, your investments make you more, as well.

4. Tax Advantages

Investing in real estate comes with tax benefits. You can deduct several expenses associated with owning an investment property, including your property taxes, mortgage interest, property management fees, property insurance, the costs of ongoing maintenance, the cost of repairs and the money you pay to market your property to potential renters. If you sell your property for more than you paid for it, the gain you realized won't be taxed as income. Instead, it will be taxed as capital gains, which typically come with lower tax rates than does income. If you invest in opportunity zones – neighborhoods that are in need of investment – you'll pay even less in capital gains.

5. Diversification

During economic turmoil, often, the investors who are diversified are the ones who feel it the least. Real estate investing can offer you protection against other sub-markets, like stocks and bonds, so even if they are going down, your real estate may still be on the rise. This can protect you against losses you take in other investments.

6. Passive Income

Real estate investing can provide passive income alongside additional sources of other income. Your investments can still be making you money without having to work everyday. A lot of people start their investing career while still working full-time. Isn't that amazing?!

7. Leverage Debt and Other Funds

Very few people can afford to buy real estate with cash. Being able to take out a loan to invest in real estate solves this problem. You get to use other people's money to purchase properties and grow your wealth. Banks, mortgage lenders or credit unions can be a source for your loans, and you'll pay them back over time. This allows you to leverage your savings to potentially buy additional properties in a shorter amount of time.

8. Stability

Real estate is often a long-term investment, and you can hold on to it for several years. In the meantime, you can rent it out, making recurring income.

9. Build Your Net-Worth

The obvious goal of investing in real estate is to grow your net worth and own assets that pay you. When you sell a property that has risen in value, you generate revenue and boost your cash assets. This can be a vehicle for you to repeat the process of invest in other things. Over time, you can buy more valuable properties and make bigger profits. The key is to make sure you're making smart decisions and buying the right properties.

10. Fulfill Your Mission

When you own real estate, you control what you do with your money and how it gets to work for you. At the end of the day, it's a vehicle for you to fulfill your dreams, contribute to your family and community and be a positive influence on your country.

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How Homeownership Can Help Shield You from Inflation

Wed, 18 May 2022 14:10:02 -0500

If you’re following along with the news today, you’ve likely heard about rising inflation. You’re also likely feeling the impact in your day-to-day life as prices go up for gas, groceries, and more. These rising consumer costs can put a pinch on your wallet and make you re-evaluate any big purchases you have planned to ensure they’re still worthwhile.

If you’ve been thinking about purchasing a home this year, you’re probably wondering if you should continue down that path or if it makes more sense to wait. While the answer depends on your situation, here’s how homeownership can help you combat the rising costs that come with inflation.

Homeownership Offers Stability and Security

Investopedia explains that during a period of high inflation, prices rise across the board. That’s true for things like food, entertainment, and other goods and services, even housing. Both rental prices and home prices are on the rise. So, as a buyer, how can you protect yourself from increasing costs? The answer lies in homeownership.

Buying a home allows you to stabilize what’s typically your biggest monthly expense: your housing cost. If you get a fixed-rate mortgage on your home, you lock in your monthly payment for the duration of your loan, often 15 to 30 years. James Royal, Senior Wealth Management Reporter at Bankrate, says:

“A fixed-rate mortgage allows you to maintain the biggest portion of housing expenses at the same payment. Sure, property taxes will rise and other expenses may creep up, but your monthly housing payment remains the same.”

So even if other prices rise, your housing payment will be a reliable amount that can help keep your budget in check. If you rent, you don’t have that same benefit, and you won’t be protected from rising housing costs.

Use Home Price Appreciation to Your Benefit

While it’s true rising mortgage rates and home prices mean buying a house today costs more than it did a year ago, you still have an opportunity to set yourself up for a long-term win. Buying now lets you lock in at today’s rates and prices before both climb higher.

In inflationary times, it’s especially important to invest your money in an asset that traditionally holds or grows in value. The graph below shows how home price appreciation outperformed inflation in most decades going all the way back to the seventies – making homeownership a historically strong hedge against inflation (see graph below):

So, what does that mean for you? Today, experts say home prices will only go up from here thanks to the ongoing imbalance in supply and demand. Once you buy a house, any home price appreciation that does occur will be good for your equity and your net worth. And since homes are typically assets that grow in value (even in inflationary times), you have peace of mind that history shows your investment is a strong one.

Bottom Line

If you’re ready to buy a home, it may make sense to move forward with your plans despite rising inflation. If you want expert advice on your specific situation and how to time your purchase, let’s connect.