There are several tax benefits when you decide to invest in Milwaukee real estate. Here’s what they are!
Many people decide to invest in real estate for the fortune it might bring you. Others, however, opt for it because of the many tax benefits that come with it. Yes, there are many ways you can save on taxes when you’re a real estate investor.
There are several tax-saving strategies you can take advantage of in Milwaukee. Being a real estate investor can affect your income tax return in a very positive way. Although Sparks Property Investors LLC is not an accountancy firm, we have researched what tax benefits come with real estate investing, and we’ve decided to share this knowledge with you.
Here are three tax benefits of real estate investing that can help you get through the next tax season!
When you are a real estate investor, you may deduct some costs and expenses from your annual income tax.
The biggest tax benefit is the deduction of mortgage interest. This doesn’t apply just to an original loan on your primary residence. Instead, you can also apply it on investment property loans, refinanced mortgages, as well as lines of credit or home equity loans. This also includes insurance premiums or any other payment that went through your escrow account.
You can also deduct almost all expenses of managing your property and your overall real estate investing business. This also includes every trip you take to see a new property or anything from your home office such as internet or phone bills.
House improvements can also be considered as business expenses. This includes roof replacements, adding another room, kitchen makeovers, new plumbing, and so on. All of this can increase your home value. These can be depreciated over years.
As for repairs, however, tax benefits only apply to those that keep the property in an efficient and operational condition. This, for example, includes fixing gutters, repairing leaky plumbing, repainting the walls, etc. You can deduct these immediately, as with most other expenses.
As time goes by, the IRS takes into account any possible wear-and-tear that a building will experience. This is called depreciation. Over time, you can utilize this as a yearly tax write-off. This will reduce the tax liability.
Over the course of several decades, you’re able to deduct the depreciating value of a building. For commercial properties, this is 39 years, and for residential properties, it’s 27.5 years.
For example, say you own a $200,000 residential property. Most of the time, you can write off around 85% of the property’s value. The other 15% is land, which you can never depreciate. This means that you can depreciate around $170,000 over the course of 27.5 years, which roughly translates to $6,200 every year.
This helps you earn money as time goes by. For example, if you were earning $400 a month in rental income, this means $4,800 per year – while the deductible tax is $6,200. In other words, you’ll be having a ‘phantom gain’.
The 1031 exchange is a way for a real estate investor in Milwaukee to delay paying taxes once they sell a property.
On normal occasions, you have to pay taxes for your capital gains. However, thanks to the 1031 exchange, there is an exception to this. When you reinvest capital gains in another property, you can postpone paying taxes for it. This is because this is counted as an exchange – you’re exchanging property for another one.
While there are some criteria this new property needs to meet, if you manage to do everything by the book, you can count on the tax benefits from the 1031 exchange. This strategy can help you invest 100% of your profit into a better, more valued property.
Start Investing In Real Estate To Gain These Tax Benefits
There are plenty of tax benefits in real estate investing. This includes long-term capital gains and a self-directed IRA, but these three are the ones that you can gain the most out of. With these benefits, you can generate a fine income and decrease your tax liability at the same time. By becoming a real estate investor, you can gain leverage for the things money can do to you.