Some of my clients have been successful in real estate investing. As landlords and property owners they are using assets to build wealth. Do I think real estate investing is a sound way to make money? Yes, for those who understand the fundamental factors of economics and risk, real estate can be a solid investment.
If you are looking for a source of income with tax benefits, real estate is worth considering. Here’s why:
When you buy property – rental houses, storage units, apartment buildings, etc. - you collect a steady stream of rental income. Unlike wages from a job or a business you participate in, rental income isn't considered to be earned income. Schedule E is used to report "passive" income which is not subject to the additional self-employment tax. Landlords remain exempt from having to pay Social Security and Medicare tax on their rental income. Passive income is income that you receive, but don't actually work for and "earn."
Additional Tax Benefits
- Property Depreciation. Unlike other business expenses, depreciation can be considered a paper loss. This means that you don’t have to spend any money to be eligible. This expense can offset taxable income and save money on your tax bill. The useful life of residential rentals and commercial property is 27.5 and 39 years respectfully.
- Itemized Deductions. Rental property owners can deduct business expenses from the rental properties. For owners of primary and secondary residences, home equity debt cannot be deducted unless the proceeds are used to purchase or improve rental properties.
- Capital Gains Tax. As of 2018, long-term capital gains tax rates are between 0% to 20%, depending upon your tax bracket, lower than the equivalent income tax on ordinary income. Also, if you live in a house as your principal residence while remodeling for resale your profit can be tax-free up to $250,000 as an individual or $500,000 as a couple.
While tax benefits may be a compelling reason to invest in real estate they should not be the sole reason. An investment property is a business that will take work, often lots of it, and time. You need to make sure real estate fits your lifestyle. It’s not for everyone so do your homework and figure out what’s best for you. And if you choose to invest in real estate, be sure to build a team of professionals to support you. One of the most critical team members will be a tax professional like a CPA.
Note: The Tax Cuts and Jobs Act (TCJA) enacted changes to the Internal Revenue Code that affect real estate investors and landlords. Property owners should consult their accountants and tax professionals for advice. You should work with your tax advisor to maximize your tax saving strategies as part of your long-term financial plan.
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Are you interested in learning more about income tax services in Washington DC or another location? We offer business accounting services for the local Washington DC area, as well as virtual services that are available for people anywhere in the United States. Contact us to learn more: (202) 789-8898