Tax Breaks in Real Estate, Real Estate, Tax, Real Estate Guide, Real Estate Buying and Selling, Commercial Properties, Real Estate Investment, Real Estate financing   Tax Breaks in Real Estate, Real Estate, Tax, Real Estate Guide, Real Estate Buying and Selling, Commercial Properties, Real Estate Investment, Real Estate financing 
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Tax Breaks in Real Estate

Home > Real Estate > Tax Breaks in Real Estate

Few investments offer as many tax advantages as real estate. Consider some of the major ones pertaining to real estate tax:

Tax Breaks in Real Estate, Real Estate, Tax, Real Estate Guide, Real Estate Buying and Selling, Commercial Properties, Real Estate Investment, Real Estate financing
  • The government permits an Investor to deduct payments of interest (with some Limitations) from federal income taxes (and from state taxes that are based on federal tax returns).


  • The property tax paid on real estate is deductible.


  • Even tax on a huge profit from a home sale can be deferred, and perhaps not paid in the lifetime of a property owner, if a home of equal or greater value is purchased with the proceeds within two years of the time of sale.


  • Money can also be taken out of a home without paying an immediate tax, by refinancing it at the higher value that it will enjoy after appreciation.


  • Depreciation may be claimed (with some limitations) for the deterioration of any building from which you receive rental income.


  • The expenses of maintaining, repairing, or upgrading a building, or landscaping or fencing the property around it, can be deducted when the owner rents the property to another party for income.


  • Rehabilitation of commercial and historic structures and of certain residential properties can add extra tax benefits.


  • The tax on any appreciation from the property can be deferred indefinitely by exchanging it for like property of equal or greater value.
These real estate tax advantages, plus the prospects for a gain in value over time, have made real estate a prime investment for many people.

The depreciation factor

The government recognizes that buildings deteriorate and/or become obsolete, and allows a taxpayer owning rental property to offset taxable income by a certain amount each year to provide for that deterioration.

The law is particularly helpful if you are a real estate investor with some other income to offset or shelter. Then depreciation may allow you to show a loss on paper and use it to offset related or unrelated income. The tax on the appreciation in the property's value is deferred until it is sold. Note, however, that the tax rules that take effect in 1987 greatly restrict one's ability to use such losses to offset other income.

Accountants use government-set standards to establish a depreciation schedule on a building that will provide the maximum amount of tax shelter. Residential rental property must be depreciated under the straight-line method over a 21-year span of time, while commercial property is depreciated over a 31-year span.

Suppose an apartment building with a $100,000 depreciable basis returns an annual $5,000 cash flow, after subtracting all expenses including interest and taxes. To find the taxable amount, divide $100,000 by 27.5 to get the depreciation, $3,636. Then subtract the $3,636 from the $5,000 cash flow; you will pay taxes on the remainder, $1,364. When the property is sold, the accumulated depreciation is subtracted from the basis, thereby producing a larger capital gain to be taxed. Still, taxes on these gains are postponed until that sale.

Losses on passive investments

Losses on passive investments (as in a limited partnership, where the owner has no managerial role) cannot easily be used to offset other income.

Such losses are only usable to offset: 1) passive income; 2) up to $25,000 of other income with losses from rental property for those who operate the property themselves and have less than $100,000 of adjusted gross income (those with $100,000 to $150,000 in adjusted gross income can offset smaller amounts); 3) other income with losses from "working Interests" in oil and gas drilling operations.


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