There’s no secret that real estate investment represents an excellent way to build wealth. By selecting properties wisely and converting them to profitable uses or holding them for future gains in the market, a savvy investor can see wealth blossom over time. Whether you plan to rent, flip, or hold a property for the purpose of appreciation gains, real estate investment marks one of the most stable, solid ways of using the money you have now to generate wealth for decades to come.
But there are a range of other advantages afforded to those who invest in Park City real estate. More specifically, those who invest their money in real estate also can enjoy a range of advantageous tax benefits that can make their investments even more impactful. While not every real estate investor gets involved in the market for the tax breaks it affords, smart investors understand that the tax benefits afforded by purchasing real estate can magnify the other financial benefits by allowing you to keep more of the wealth your investment brings. Keep reading to learn about five of the top benefits enjoyed by those who invest in real estate.
Real estate, like any other asset or property, can depreciate in value over the course of its lifetime. For example, buildings experience wear that may lower the overall value of the property over time, and the IRS acknowledges that fact through depreciation. The IRS standard for residential property depreciation is 27.5 years, and for business properties the timeline is 39 years. Depreciation can provide you with tax shelters that allow you to subtract the depreciation value on your properties from your taxable income, which can be a sizable amount for those who own several properties.
If you earn money from a traditional salary, you will see more than 7% of your income go towards FICA taxes which fund Social Security and Medicaid. That number is upwards of 15% for the self-employed. However, if your income is generated through property rental, for example, then you pay no FICA tax on those earnings. That’s because earnings generated from property rental aren’t subject to payroll taxes, such as FICA.
While the IRS gives you credit for the depreciation of property as a real estate owner, there is no tax levied against the appreciation of your property as it increases in value over time. Many investors simply purchase and hold property to build wealth, since holding property doesn’t drain wealth. Instead, it can maximize the financial impact of your investment since there is no tax on appreciation and selling properties generates many secondary costs that are involved in real estate transactions.
Capital gains taxes on properties vary depending on the term of property ownership. Long-term capital gains taxes are extremely low, ranging from 0% to 20% depending on the tax bracket of the investor. The key is to keep the properties for the long term. If the same property is sold in the short term, then the higher short-term capital gains tax rate will be assessed. Therefore, buying and holding properties over a longer term can result in sizable breaks in capital gains taxes, if any taxes are due at all.
Many property investors who want to generate cash flow end up selling their properties to accomplish that goal. However, that can prove unwise in the long term, as it forces the sale of a property that may have been more profitable if held over time while exposing the investor to higher taxes, such as the increased capital gains tax for short-term investments. However, refinancing existing real estate allows investors to avoid the short-term capital gains rate while holding the property for the long term. At the same time, the investor can realize enhanced cash flow without incurring the negative aspects of a short-term sale.
If you’re considering real estate as a potential investment, understand that the benefits of real estate investment extend into the realm of taxation as well. With a well-crafted real estate investment strategy, a wise investor can reap a full range of financial benefits, including tax breaks, that will allow wealth to build exponentially. To learn more about the many tax benefits that can be earned through real estate investment, contact The Park City Investor at (435) 640–6966.