Investing in real estate is a relatively easy and effective way to generate passive income. However, to optimize the income you enjoy, it is important to fully understand the tax benefits associated with investing in real estate and how you can make the most of them. To that end, here is a look at some of the top write-offs and deductions that can be used by real estate investors.
There are several different deductions that real estate investors can use to help reduce their overall tax burden. Some of the things you can deduct include:
- Advertising expenses
- Maintenance costs
- Mortgage interest
- Operating expenses
- Land tax
- Repair costs
- Property rental expenses
These are the primary expenses to consider in real estate investment as long as you own the investment property.
Self-employment and FICA
According to the Federal Insurance Contribution Act, or FICA, a self-employed business owner is liable for the full 15.3 percentage tax that is normally divided between an employer and the employee. However, depending on the legal structure of your real estate business, you may be able to offset this cost. For more information, consult with a CPA who is experienced in setting up real estate investor business structures so you can get the highest possible tax benefits.
A Section 1031 Exchange allows you to exchange one real estate investment asset for another without paying taxes on the transaction. This means that you can transfer the earnings of one investment to the other, effectively allowing you to avoid taxes until you sell at a later date. Properties must meet certain criteria to be eligible for this tax benefit.
If you own an investment property, you should always document your expenses so that you can take advantage of the deductions that you are allowed. Make sure you have a CPA working on your behalf.
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