Real estate ownership provides multiple tax benefits. Some become available when a property is sold, and some are in effect every time you file an income tax return. Let’s start with the savings you can incur when you sell a property.

 

Selling

The IRS provides two different avenues property owners can use to build wealth when they sell real estate. The first way allows primary homeowners to receive tax-free sales proceeds. The second method provides investors the means to defer the payment of any capital gains tax.

 Primary Residence

One of my videos (https://bit.ly/CapitalGainsVideo) presented an in-depth discussion on a capital gains tax exemption when someone sells their primary residence. If you own and live in the home for two of the past five years, you can walk away with $250,000 of the profits as tax-free money if filing singly and $500,000 if filing jointly.  

Investment Property

Another one of my videos (https://bit.ly/1031ExchangeVideo) discusses indefinitely delaying the payment of capital gains tax when investment property sells. This is accomplished through a 1031 exchange that enables someone to roll over the proceeds of one investment into the purchase of another like-kind property. An investor can mix and match sales and purchases of vacant land, residential (1-4 units), and commercial property. However, they cannot roll over the proceeds into purchasing artwork, stocks, or any other type of investment. They must exchange real estate for real estate.

 

Annual tax return

Tax advantages are different for owner-occupied and investment properties. Own both types and reap the benefits. In some cases, taxpayers must itemize the deductions to obtain maximum benefit.

Primary Residence

  • Property tax

 

  • Mortgage interest (max $750,000 mortgage debt)

 

  • Home office ($5/sq.ft. up to 300 sq. ft. for unsalaried freelance homeowners)

 

  • Mortgage points for the year of purchase

 

  • HELOC (for home improvement) interest

 

Investment Property Property tax

  • Hazard, liability insurance

 

  • Mortgage interest – no limit

 

  • Property management fees

 

  • Routine maintenance repairs

 

  • Depreciation ((Value of structure at time of purchase – value of land)/27.5 years residential and 39 years for commercial.) One way to value land is to look in the county tax record. Depreciation is recaptured when the property’s sold unless it’s exchanged.

 

  • Advertising expenses for rental properties

 

To take full advantage of these deductions, be sure to keep good records. Consult with a CPA if you have any further questions.