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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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What is a Home equity line of credit (HELOC)?

Wed, 24 Aug 2022 14:12:22 -0500

A home equity line of credit, or HELOC, is a type of home equity loan that allows homeowners to borrow money against the equity they have in their home and receive that money as a line of credit. Borrowers can use HELOC funds for a variety of purposes, including home improvements, education and the consolidation of high-interest credit card debt. HELOCs typically have lower interest rates than personal loans. You'll likely get a better rate if you have a high credit score, a low debt-to-income ratio and a lot of equity in your home.

Find out how much you can draw.

Let a Gapital Pro help you with the best refinance options.

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How to Pay Back a HELOC

A HELOC has two phases that separate borrowing and repayment, also known as the draw period and the repayment period. Be aware, however, that you’ll make payments on the loan during both periods.

Phase 1: The Draw Period

The first phase, called the draw period, is when your line of credit is open and available for use. During this period, you’ll be allowed to borrow from your line of credit as needed, making minimum payments or possibly interest-only payments on the amount you’ve borrowed. If you reach your limit, you’ll have to pay off some of what you owe before you can continue borrowing.

If you want to extend your draw period, you may be able to refinance your HELOC to do so.

Phase 2: The Repayment Period

Once you reach the end of your draw period, you’ll no longer have access to the HELOC funds and will have to start making full monthly payments that cover both the principal and interest. This is the repayment period. If you’ve been making interest-only payments up to this point, be prepared for your payments to go up, potentially by a lot.

The length of both periods will depend on the loan you get. For example, you may decide that a 30-year HELOC, with a 10-year draw period and 20-year repayment period, makes the most sense for you.

Typically, lenders won’t allow you to borrow against all the equity you have in your home in order to keep your loan-to-value (LTV) ratio below a certain percentage. This is because lenders want you to have a certain amount of equity in the home, since you’re less likely to default if you could possibly lose the equity you’ve built up.

Pros and Cons of HELOCs

HELOCs offer a combination of relatively low interest rates and the flexibility to borrow what you need when you need it. If you need money over a staggered period, a line of credit is ideal. However, there are always risks when you take out a loan, especially one that's secured by your home. Here are some of the key considerations for getting a HELOC.

PROS

Typically lower upfront costs than with home equity loans.
Lower interest rates than with credit cards.
Usually low or no closing costs.
Interest charged only on the amount of money you use.

PROS

Lenders may require minimum draws.
Interest rates can adjust upward or downward.
Lenders may charge a variety of fees, including annual fees, application fees, cancellation fees or early closure fees.
Late or missed payments can damage your credit and put your home at risk.

HELOC vs. Home Equity Loan

While HELOCs and home equity loans are similar in some ways, they have a few distinct differences. These are some of the key factors you should consider when deciding between a HELOC and a home equity loan.

	HELOCs	Home Equity Loans
Interest Rates	Variable	Fixed
APRs	Slightly lower	Slightly higher
Disbursement	When needed	Lump sum
Repayment Terms	First 5-10 years: Interest-only payments Last 10-20 years: interest and principal	10-30 years of fixed payments
Best for	Ongoing home improvement projects, college tuition payments, medical expenses	Debt consolidation, large home improvement projects, major purchases

HELOC vs. Cash-out Refinance

A cash-out refinance replaces your current home mortgage with a larger home loan. The difference between the original mortgage and the new loan is disbursed to you in a lump sum. The main difference between a cash-out refinance and a HELOC is that a cash-out refinance requires you to replace your current mortgage, while a HELOC adds a loan to your current mortgage.

A HELOC may be a better option for you if:

You want more flexibility.
You already have a good mortgage rate.
You plan to use your HELOC only for tax-deductible home improvement projects.

A cash-out refinance may be a better option for you if:

You prefer a fixed monthly payment.
You want a lower mortgage rate.
You want to withdraw more home equity.

Apply for a HELOC.

A Gapital Pro will walk you through your options and help you make the best mortgage choice.

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Frequently Asked Questions About Loan Products & Options

Mon, 24 Jan 2022 12:36:01 -0600

We currently offer fixed and adjustable rate FHA loans, VA loans, USDA loans, conventional loans, Non-QM loans and jumbo loans.

We finance properties including:

Single-family homes
Multi-family homes (up to four units)
Townhouses
Condominiums
Planned Unit Developments (PUD)
Manufactured/modular homes

Do you offer loans for investment properties?

Yes, we do offer loans for investment properties.