Year End RE Investment - TAX benefits for the Savvy Investor

Dec 10

Written By Pinnacle Real Estate Investment & Development

There are many advantages to real estate investing, and tax benefits is one that stands out. With the 2021-year end in sight, real estate investing can be a great option to manage and shelter the earning that you work so hard for. It’s encouraging to consider real estate as an investment when you’re trying to decide on the many investment opportunities out there. Obviously, speak with your accountant and thoroughly inspect and research any property you’re seriously thinking about purchasing.

RE Investing can be an important tool in growing wealth. An additional benefit instead of investing in stocks, mutual funds, bonds, and real estate is the favorable tax treatment for long term capital gains.

An investor holding a capital asset for longer than one year enjoys a preferential tax rate of 0%, 15%, or 20% on the capital gain, depending on the investor’s income level. If the asset is held for less than a year before selling, the capital gain is taxed at ordinary income rates. Understanding long-term verses short-term gains is important for growing wealth.

An important stipulation on the IRS tax laws is that you’re taxed only on realized capital gains, that is, when you sell an investment for cash. In fact, you can hold your investments indefinitely and permanently defer any tax on gains.

But that’s only one side of the benefits from the buy-and-hold approach. Your investments will likely perform better if you buy and hold for more than a year. Research consistently shows that passive investing tends to outperform active investing over longer periods. So buy-and-hold investing can help you win in two ways: you’ll likely make more money and you’ll pay less of it to the IRS.

Consider a 1031 Exchange

If you’re a real estate investor, it can make a lot of sense to use a 1031 exchange if you’re selling a property and looking to reinvest in another. The 1031 is a type of exchange allowing you to sell one investment property and defer your capital gains. So as long as you invest the proceeds in another investment property. Like other types of assets, you can hold on to your investment and defer capital gains, potentially for decades and you will avoid those high real estate commissions.

The Bottom Line

The increased number of real estate sales and the timing of your investment has allowed many people to receive favorable tax treatment from the federal government. As a result, consulting with a tax professional and understanding these options will help shelter taxes and increase the long term growth of your portfolio. If you want to win at the game of wealth, you need to know the rules and nowhere is that clearer than when learning how to slash your income taxes. Learn how to capitalize on the tax advantages granted to real estate owners. Throughout your life, they can save you hundreds of thousands of dollars or more and help you put more of your money toward building wealth.