What Are the Tax Benefits of Investing in Real Estate? A Guide for Investors

Are you interested in joining the ranks of Americans who’ve decided not to settle for retirement accounts to finance their futures? Whether you’re just testing the waters or a seasoned investor, you’re spoiled for choice with the plethora of investment vehicles currently available.

From stocks and bonds to cryptocurrency and mutual funds, narrowing your options can be a dizzying process — let alone deciding where to put your money. “Analysis paralysis” is not uncommon — and that’s OK! This post only focuses on one option. I’ll give you the details on an alternative investment that could make a great addition to your current portfolio: real estate.

This article explores how real estate investments could benefit your overall financial health, paying special attention to the potential tax benefits. If you’ve been wondering, “What are the tax benefits of investing in real estate?” this handy little guide is a good place to start your journey..

Why Invest in Real Estate?

When it comes to deciding where to invest your money, you have a lot of freedom. However, with that freedom comes the burden of choice. With all of the options available, it can be challenging to select where you place your finite resources. One such option is real estate investing.

Real estate investing comes with a host of characteristic that are potentially beneficial, including:

• Monthly Rents as Passive Income. One of the most widely acknowledged benefits of investing in real estate is the passive income generated by rents¹. Instead of going to work every day or spending a lot of energy to make money from your properties, you can usually expect a consistent cash flow of rental income.
• Tangible Assets. Unlike many other investment options that only exist in the abstract, real estate is one that you can see and touch. When you own a property, you own something with a physical form rather than just an agreed-upon value². Investment properties offer added dimensions like personal enjoyment and utility since you can see and use them.
• Portfolio Diversification. You’ve probably heard the phrase, “Don’t put all your eggs in one basket.” This solid advice applies to more than just transporting unborn poultry. When it comes to investing, nobody truly knows what the future holds; an investment vehicle that brings in great returns one day could start hemorrhaging money the next. The best way to protect yourself from economic turmoil is to diversify your portfolio³.
• Hedging Against Inflation and Market Volatility. Inflation makes the prices of goods and services increase system wide, which can be detrimental to investment vehicles like stocks and bonds. Spikes in pricing can cause uncertainty in markets, slow down spending, and decrease economic growth. However, as the price of goods and services rises, home values and rents typically increase as well. Real estate investors can hedge against this volatility by raising rents to counteract the potential downturn of other investment options from inflation⁴.
• Tax Benefits. When you invest in real estate, you open the door to a bevy of tax benefits to which you may otherwise not have access⁵. Benefits like deducting expenses associated with owning an investment property can go a long way toward your bottom line during tax season.
  
  

As you can see, there are plenty of reasons to get excited about investing in real estate. It gives investors the potential to receive a passive, steady cash flow, enjoy an asset that they can touch and become attached to, and allows you to potentially protect investments against market volatility and inflation by having another asset in their portfolio, specifically one endowed with more protection against inflation than others. This section serves mainly as a brief overview of real estate investing, so we’ve only scratched the surface in terms of general benefits. However, each is on a case by case basis and no investments guarantee success. So, you should always talk to your financial advisor

Now, let’s take a moment to discuss some of the tax benefits of real estate investing in greater detail.

What Are the Tax Benefits of Investing in Real Estate?

Now that you know a bit more about the general reasons for investing in real estate, you may still be wondering, “What are the tax benefits of investing in real estate?” Lucky for you, I’ve included a breakdown of some of the most noteworthy tax advantages so you can walk away with a better idea of how and where to invest your hard-earned money.

On top of the steady rental cash flow, a hedge against market volatility, and a diversified portfolio, real estate investing comes with certain potential tax benefits that can help you optimize potential savings on your yearly return. As with any financial decision, these are not necessarily guaranteed and you should always check to see how they fit into your portfolio.

Mortgage Interest Deduction

Designed for homeowners and investment property owners, this tax incentive allows you to subtract the amount of interest paid toward a mortgage from your taxable income. The deductible amount is decided each year by your mortgage company and listed on Internal Revenue Code Form 1098. Mortgage interest deductions can be a boon to investors whose qualified itemized deductions — including mortgage interest — is greater than the standard deduction.

Property Tax Deduction

This tax advantage allows real estate investors to deduct state and local taxes they pay on investment properties from their federal income taxes.

For example, if you purchased a $750,000 property in San Francisco, which has a county tax rate of .740% of the assessed home value, you’re looking at $5,550 in local taxes. On top of that, the state of California is going to want .710% of the assessed value in taxes, which comes to an additional $5,325.

This means you could potentially owe a total of $10,875 in property taxes to state and local governments. Thankfully, the property tax deduction allows you to write that amount off when you file federal income taxes the following year.

It’s worth keeping in mind that this tax deduction is subject to certain state and local limitations and restrictions. Make sure to clarify any lingering questions with your tax professional.

Passive Loss Benefit

Real estate investments can generate passive income or passive losses. If you actively participate in real estate investing, you may be able to deduct up to $25,000 in passive losses against your passive income⁶.

However, this is limited to investment properties in which you are currently active. So if you sell a property because it’s bringing in losses, you can no longer use this deduction.

Depreciation

Depreciation is a method of assessing the cost of a physical asset like real estate over the course of its useful life⁷. Instead of taking a single deduction for the year you purchased or made significant improvements to a property, depreciation allows you to distribute the deduction across the useful life (estimated years of service for profitable revenue generation) of the property.

Depreciation begins the moment you place a property into service. In this case, as soon as it’s ready to be used for rental services. Essentially, as long as you are using a rental property to generate income, you can deduct the costs of buying and improving that property from your taxes and potentially lower your taxable income.

1031 Exchange Tax Deferral

Whenever you sell an investment property, the IRS wants you to pay capital gains taxes on the amount of profit from the sale. Typically, capital gains taxes are a taxed percentage that’s deducted from the profit on sales of capital, like real estate.

For example, if you purchased a property for $500,000 in 2015 and sold it for $750,000 in 2023, you’ve made a $250,000 profit. If you’re in a tax bracket that requires you to pay 20% in capital gains taxes, you’ll have to pay $50,000 of those proceeds in taxes.

However, if you opt for a 1031 exchange, you can defer those taxes by purchasing a “like-kind” property — one of equal or greater value — and reinvesting the sale proceeds into the new property. This keeps money in your pocket and can potentially increase your purchasing power when upgrading your real estate portfolio.

With this overview of tax benefits from investing in real estate, you should have a clearer idea of whether or not investing in real estate is the right move for you. However, I cannot stress strongly enough that, before making a decision, you should discuss how real estate investments fit into your portfolio with your financial advisor. And clarify all requirements, implications, and tax benefits with your CPA or tax advisor.

One of the barriers to entry for many potential investors when testing the waters of real estate is, despite the passive wealth accumulation, investment properties come with additional responsibilities — as physical and administrative tasks. You’ll have to manage your properties effectively, keep up with laws and regulations, or hire a third party to handle these things for you. However, there are ways to enjoy the benefits of real estate investing without requiring you to be actively engaged.

We may have a solution for you.

Enjoy the Benefits of Real Estate Investing Without the Headaches: Partner with Canyon View Capital

Here at Canyon View Capital, we understand the ins and outs of real estate investing. That’s because for over 40 years our professionals have managed real estate and have amassed a portfolio on behalf of our investors that now exceeds over $1B⁸ in aggregated value. Although getting started in a new investment realm can be intimidating, the CVC team uses our shared expertise to guide investors through the world of real estate investing.

Our real estate investment options offer our clients truly passive income that brings them the benefits of real estate investing without the daily responsibilities. Moreover, for those looking into 1031 exchanges, we help ensure your seamless navigation through all the hurdles.

But most importantly, the professionals at CVC are committed to making sure that investors like you have a thorough understanding of their options so you don’t have to wonder about things like “What are the tax benefits of real estate?” anymore. A bright financial future lies ahead and we want to help you find the path!