Property Investing - Tax Benefits
Let’s take a look at the other huge advantage offered by real estate investing: tax benefits. There are four main benefits you can get from the government when you invest in real estate.
First, the income you receive in the form of rent is not subject to Social Security or self-employment taxes as the money you earn working is. This break alone gives you very favorable income tax treatment.
Second, each year you can deduct a portion of the cost of buildings and personal property from the income you receive from renting the property. This is called depreciation and may be deducted even though the buildings are probably going up in value.
Furthermore, if the property shows a loss after deducting operating expenses, mortgage interest, and depreciation, within limits, you can use this loss to offset taxes on money you earn on your job.
Third, if you decide to sell the property, you can defer paying income tax on your profits by using them to purchase another real estate investment within certain allowed time frames. You can actually avoid paying taxes altogether on the profits if you live in the property for two of the five years prior to selling it.
And fourth, if you sell a property you have owned for 12 months or more and just want to keep the profit, it is taxed as a long-term capital gain at a rate of 20% or less. When you compare this with rates as high as 39% on money you earn from your job, it is a tremendous tax break.