Why Real Estate? Tax Advantages!

Why Real Estate? Tax Advantages!

Taxes are your largest single expense — reduce them through rental property investments

Is there anyone here who doesn’t love to save money when it comes to taxes? If your hand is up, you don’t need to read any further. But if your hand is down, then listen up: Real estate offers some serious advantages when it comes to taxes.

If you refer to the CASHFLOW Quadrant (which divides people into four types of income earners: Employees, Self-employed, Business Owner and Investors), you’ll realize that our government purposely rewards people for being on the left side of the quadrant — owning a big business or being an investor. These two quadrants pay the least amount in taxes, between 0% and 20%. If you compare that to employees and those who own small businesses — who pay between 40% and 60% taxes — you’ll see the right side of the quadrant takes the biggest tax hit.

Why? Watch this video to learn the secrets Robert, myself and our CPA Tom Wheelwright figured out decades ago. You’ll never look at your taxes the same way again, trust me. And you’ll be clamoring to figure out how to begin investing, even on a small scale, to take advantage of those tax breaks.

Now, let’s examine some of the other ways investing in real estate can help reduce your taxable income:

  1. Deductions. Did you know that you can deduct certain rental expenses — such as mortgage interest, property tax, operating expenses, depreciation and repairs — from your tax return? Make sure to keep track of deductible expenses, such as receipts, in case you are audited. Also, keep track of any travel expenses you incur for rental property repairs. The IRS is a great place to read more about real estate deductions.
  2. Pass-through entities. Thanks to the Tax Cuts and Jobs Act of 2017 (TCJA), residential landlords who operate as pass-through entities (a special business structure, such as sole proprietors, LLCs and S corps, that eliminates the burden of double taxation) can now deduct 20 percent of net rental income right off the top. Yes, you read that right: this essentially makes 20 of your profits tax-free. There are some limitations and exceptions, so be sure to consult your tax advisor before assuming you qualify.
  3. 100% bonus depreciation. Prior to the tax changes, business owners were eligible to deduct up to half of the cost of assets that they purchased for their business in one year — now landlords can deduct 100 percent of the personal property for rental units. This law changes again in 2023, so now is the time to take advantage. These rental unit improvements could include appliances, a new roof, upgraded HVAC systems, fire protection and alarm systems, and even furniture.
  4. Low income housing tax credits. The Low Income Housing Tax Credit program provides tax incentives to encourage developers to create affordable housing. As an incentive to make equity investments in affordable rental housing, private investors receive a federal income tax credit.
  5. Historic building tax credit. There’s a federal tax credit for investors who rehabilitate qualifying historic buildings — they can claim 20 percent of eligible improvement expenses against their federal tax liability. Note: With the new TCJA, taxpayers must now take this credit over five years instead of in the year they placed the building into service. Read more here.

While these are some of the big tax advantages, there are also a few tax loopholes that successful investors know about — Rich Dad Advisor Garrett Sutton shares a few of those loopholes here, and even more in his book Loopholes of Real Estate: Secrets of Successful Real Estate Investing.

I cannot reiterate enough how important it is to choose the right tax advisor to ensure you’re complying with the law when it comes to these tax advantages and loopholes — and that you’re taking advantage of every tax benefit you can! Don’t miss these some tips on how to choose the right tax advisor, from Rich Dad Advisor and CPA Tom Wheelwright.

If you’re ready to get your feet wet, refer back to my recent blog about getting started in real estate — the tax advantages, cash flow and freedom are second to none!

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