Achieve Investment Group

Passive Real Estate Investing Tax Benefits

Passive Real Estate Investing is a strategy that seeks to create a stream of passive income by purchasing real Estate and renting it out. This is similar to Passive Income; however, in this case, you use your own money to purchase Real Estate instead of investing other people’s money. Passive real Estate investing involves owning rental properties and letting someone else manage them. You earn income from the rent payments, but you don’t have to do any of the day-to-day management of the property. The passive income tax benefits of investing in real Estate are substantial. Investing in real Estate allows you to deduct up to $25,000 from your taxable income each year. This deduction is called depreciation and can be claimed on residential or commercial property. Passive real Estate investing is often considered the simplest way to make money with your properties. It’s also much easier than buying a home, fixing it, and selling it. When you invest in a property as a passive investor, there are no repairs or improvements to worry about. Instead, you can find a good deal on a rental property, sit back, and collect monthly checks from renters. Passive Real Estate Investing Tax Benefits There are potential tax benefits to investing in real estate, including multifamily properties, through a passive income strategy. When you invest in real estate, not only do you receive a larger return on your investment, but you also have the potential to save money on taxes. The following are some of the more common tax benefits of passive RE investing: Tax Savings: When you buy real Estate as an investment, it may be taxed as ordinary income or as capital gains. No special tax breaks and deductions are allowed if it’s taxed as ordinary income. If it’s taxed as capital gains (which is usually preferable), then you can potentially save money by paying lower rates on long-term capital gains rather than ordinary income tax rates Mortgage Interest Deductions: You can deduct mortgage interest payments made on loans used to finance investment property; however, the limit is $1 million per year total across all mortgages Depreciation Deductions: You can deduct depreciation from your rental income before calculating your taxable income. Depreciation is an expense related to owning real Estate, but it’s not an actual cash outlay. Instead, it’s an allowance for the wear and tear on your property over time due to normal use, maintenance, and repair costs. You don’t have to pay taxes on depreciation because it’s not cashing in hand — it’s just an accounting method for tax purposes. Tax-deferred growth: When you invest in a traditional IRA, 401(k), or other retirement accounts, you defer taxes until withdrawal. However, with an investment property, you can defer taxes during the holding period and any improvements made to the property. You can also deduct depreciation on any major improvements made to the property or building. Losses and write-offs: When you buy a property, its value can change over time — sometimes quickly. Real estate investors may see their properties increase in value over time, but they must also be prepared for losses if the market turns worse. Fortunately, the IRS allows investors to deduct losses from their income taxes in most cases. Passive Real Estate Investing Tax Benefits FAQs What expenses can I write off as a passive real estate investor? As a passive real estate investor, you may be able to write off certain expenses related to your rental properties against your rental income. These expenses can include the following: Property management fees Maintenance and repair costs Insurance premiums Taxes and assessments Interest on a mortgage or other debt related to the property Legal and professional fees, such as for a property manager or attorney Utilities and other services provided to tenants Advertising and marketing expenses to find tenants Travel costs for managing the property, such as for inspections or meetings with tenants It’s important to keep detailed records of all rental property expenses, including receipts and invoices, to support any deductions you claim on your tax return. You should also be aware that there may be limits on the amount of expenses you can write off, and some expenses may not be deductible. Consult with a tax professional for guidance on the specific deductions you can claim. How do I calculate the depreciation deduction for a rental property? The depreciation deduction is a tax benefit that allows investors to recover the cost of a depreciable asset, such as a rental property, over time. To calculate the depreciation deduction for a rental property, you will need to determine the following: The property’s basis: The basis of a property is typically its purchase price, plus any additional costs, such as closing costs and improvements, that add to the property’s value. The property’s useful life: The useful life of a property is the amount of time it is expected to be used for business or income-producing purposes. The useful life of a rental property is typically 27.5 years for residential properties and 39 years for nonresidential properties. The property’s depreciation method: There are several methods for calculating the depreciation deduction for a property, including the straight-line method and the declining balance method. The straight-line method spreads the basis evenly over the property’s useful life. In contrast, the declining balance method allows for a larger deduction in the early years of the property’s life. Once you have determined the property’s basis, useful life, and depreciation method, you can use the following formula to calculate the annual depreciation deduction: Annual depreciation deduction = (Property basis) / (Property useful life) x (Depreciation method factor) For example, if you purchased a rental property for $200,000, with $20,000 in closing costs and improvements, for a total basis of $220,000, and you use the straight-line method with a 27.5-year useful life, your annual depreciation deduction would be: Annual depreciation deduction = ($220,000) / (27.5 years) x (1) = $8,000 Note that this is just an example, and … Read more

5 Real Estate Investment Tax Strategies That Can Protect You From Inflation

Inflation can ruin your investment profits in several ways. Negative or declining interest rates, for instance, are one of many consequences of inflation. But there are ways you can protect yourself from inflation and its ravaging effects. Inflation and Real Estate Inflation is one of the biggest threats to real estate investors. Inflation equals a general increase in the prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services. This causes prices to rise, which means you can’t buy as much for your money as you could before inflation. It’s also called “cost-push inflation” because businesses have more costs to produce goods and services than to pay for those costs. That makes it harder for them to make a profit, which causes them to raise prices. Inflation can be good or bad for investors in multifamily properties, depending on your situation. For example, if you’re looking to sell a property in a few years, you may want to consider strategies that protect you from inflation. But if you’re planning on holding onto your investment for decades, then inflation won’t be as much of an issue. Multifamily Real Estate As A Hedge Against Inflation Is Inflation Bad For Real Estate Investors? The impact of inflation on real estate varies depending on whether you are a buyer or seller. Generally speaking, when inflation increases, so do rents and property values which means that sellers should benefit from higher selling prices while buyers may be hurt by rising mortgage payments (although they will also benefit from lower down payments). Real estate is considered an inflation hedge because it tends to perform well when inflation rises. The reason is that as prices increase, so do rents — at least in most areas of the country.  Top Five Real Estate Investment Tax Strategies Since inflation reduces the purchasing power of money, real estate investors need to protect their assets from inflation by using tax strategies. Here are six multifamily tax strategies to help protect your investments from capital gains taxes: 1. Tax-Free Exchanges with Like-Kind Property: The tax code allows you to exchange your existing property for a like-kind property without paying taxes on the gain from your original property. This is one of the most powerful strategies for protecting yourself from inflation because it allows you to defer taxes on all or part of your capital gains. For example, if you own an apartment building and want to sell it at a profit, you can exchange it for another building instead of selling it outright. If you exchange at the right time, you could avoid paying taxes altogether. However, this strategy has limitations: You must have owned and used the property for at least one year before receiving any tax benefits from an exchange. You can’t make an exchange if there was a significant improvement or customizing made after purchase (like adding an elevator). And finally, if your original property is worth less than $250,000 when making an exchange (or $500,000 if filing jointly with a spouse), then there are no limits on how much gain you can defer or avoid altogether. 2. Tax-Advantaged Investments Accounts Tax-advantaged investments, such as 401(k)s, IRAs, and Roth IRAs, are a great way to keep more of your hard-earned money. Here are some of the most common types of tax-advantaged investment accounts: 401(k)s: These plans allow employees to contribute pre-tax dollars into their retirement accounts. The contributions are deducted from an employee’s paycheck before taxes are taken. The money then grows tax-free until it’s withdrawn during retirement years. Roth IRAs: Roth IRAs offer many of the same benefits as 401(k)s with one major difference—the contributions are made after taxes have been paid. Because contributions must be made with after-tax dollars, there is no tax deduction when making withdrawals during retirement years. However, any growth in the account from interest and investment gains can be withdrawn tax-free at any time during retirement. 3. Hedging Your Portfolio With Options Options give you the right to buy or sell an asset at a specific price on or before a certain date. You’re betting on whether the underlying asset will increase or decrease in value before it expires. For example, if you’re confident that inflation will rise over the next year, you might purchase put options — which allow you to sell assets at a specified price — as an insurance policy against rising prices. If inflation rises, these options will become valuable because they allow you to sell assets at higher prices than what would otherwise be possible without them. This strategy can also be used with other types of investments, such as stocks and bonds, to protect against losses from deflation instead of from inflation. 4. Accelerated depreciation deductions Accelerated depreciation deductions allow investors to write off more than what they actually spend on their properties, thus reducing their taxable income. This strategy allows investors to reduce their tax liability and increase their cash flow by writing off more expenses than they actually incur on their properties. 5. Convert to Qualified Leases If you own a rental property, you may be able to convert your rental income into a qualified leasehold interest and avoid paying taxes on the money received until you sell the building. This strategy works best if you’ve owned the building for over two years and plan to hold onto it for at least five years to qualify for depreciation. You can also use this strategy if you’re interested in moving out of the property management business but want to keep collecting rent checks from tenants long-term. Conclusion As multifamily real estate investors, you might think that you need to watch out for the usual income taxes, but taking advantage of some of these strategies can help keep your tax liability lower. In addition, there are some ways that property management companies can use to maximize their profits and protect themselves from inflation. … Read more


Passive Real Estate Investors Need To Know This Before Filing Their 2023 Taxes!

Essential Tax Planning Tips And Strategies Before April 15th With Nationally-recognized CPAs And Tax Strategists "Amanda Han" and "Matt Macfarland"

Watch Webinar Replay