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Common Real Estate Tax Benefits - Real Estate Investment Tips

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Published on Jan 17, 2013

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One of the biggest positive factors when buying real estate is all the tax benefits you are able to realize. Real estate is actually one of the most tax-friendly investment vehicles. You can write off practically everything -- mortgage payments, expenses,...even the property itself in most cases! Of course there's multiple ways of structuring a real estate sale as well to defer tax payments.

First, let's start with the three most common ones that apply to even primary residences. Number one is the mortgage interest deduction. As a homeowner, you can write off the interest paid to your mortgage. You are also able to write off both the property taxes, AND the hazard insurance you pay throughout the year. Of course, these three benefits work with investment properties as well. And since the mortgage interest can be such a large percentage of what you pay, this is among one of the reasons investors choose to buy investment properties with a loan vs. all cash, as I discuss in my "Leverage & How To Use It Properly" video.

One other fairly common write off that sometimes goes unnoticed are loan points. You are able to write off the points paid to the lender over the length of the loan. Now please note, you can write them off the TERM LEGNTH of the loan, not the time it is amortized. If you have a 25 or 30 year amortized loan that is due in 5 or 10 years, the term length -- either 5 or 10 in this example -- is how long you can write off those points.

Investing in real estate allows you to take a few more deductions that a primary residence cant. For instance, you can ACTUALLY write off the building's improvement value over 27 in a half years or 39 years, depending if it's a residential multifamily or commercial building. You must pay a portion of this back in the form of cost recovery recapture, but I'll discuss that point in a bit. Also for investment properties, by adding the closing costs paid when you buy, and deducting the closing costs when you sell you can use adjust your basis! Along with all of this, you can deduct any repairs, property management and even utilities just to name a few.

Now when it comes to finally selling a property, many times you can differ the taxes or skip paying them altogether. If you sell your primary residence for a profit, up to $250k if you're single, or $500k if you're married is completely tax free. If you're selling an investment property, there are a few options. You can completely differ both the capital gains AND the cost recovery recapture tax by doing a 1031 exchange, which I discuss in detail in my "1031 Tax Deferred Exchange" video.

Keep in mind that I'm not an accountant, so I must recommend that you always speak with a CPA before randomly deducting items that may not be deductible. Keep in mind, there are of course other financial techniques that could help you soften the blow of the capital gains tax, such as installment notes or even a deferred sales trust, which I go over in my "Differed Sales Trust" video. It's all going to depend on what works best for you and what you're future plans are as an individual...now that's good to know.

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